The CEO, Sun Group Wealth Partners, Winnie Sun, joined Yahoo Finance Live to explain his thoughts on where to put his retirement money.
ADAM SHAPIRO: I want to move on to the issues of retirement in our retirement segment, which is brought to you by Fidelity Investments. There is a lot of confusion for many of us between the IRA, and the Roth IRA and the traditional IRA. And we hope that one day we will all appreciate that we cannot fund the IRA because we will make too much money and hit the federal border.
But to understand more about this, let’s call Winnie Sun, CEO of Sun Group Wealth Partners. I’m glad you’re here. Quite simply, the traditional IRA, when you withdraw, is taxed. Roth IRA, you don’t pay taxes when you give up. How do you decide which version of the IRA is right for you?
WINNIE SUNCE: That’s a great question, Adam. I think you know, in whatever direction you go, you should, if you can, contribute to the IRA every year. Simply put, you know, there are some income limits. I actually think the Roth IRA is like a golden egg. If you qualify, I think you should contribute strongly every year.
As long as you earn less than $ 125,000 as an individual when filing taxes or as a married couple, if the two of you file and earn less than $ 198,000, then you can go directly to Roth. That would be my first route. If you can’t do that, then a traditional IRA could actually go through a conversion to Roth as well. So, this is something you should discuss with your tax accountant.
SEANA SMITH: Winnie, are there cases where it might make sense to do both?
WINNIE SUNCE: Well, Seana, that’s a good question. You know, we are allowed to contribute for each and every year. But let me tell you – for about 20 years as a financial advisor, I haven’t seen a client contribute to both. I would say it is best to choose one or the other. There are benefits to both, but it’s usually pretty clear in that particular year which would benefit you more – whether you want to pay taxes later or want to pay taxes ahead of time.
ADAM SHAPIRO: In the last century, I had the opportunity to turn 401 (k) into an IRA, which the government allowed me to turn into a Roth in 1999– I paid taxes here and there. Fast forward to 2021 – after reading your notes on that, that Roth IRA, I still have it. But I don’t have to take money from it when I retire. And if someone is lucky enough to be in my goodness, I can leave it to them, and they don’t have to pay taxes on it, right?
WINNIE SUNCE: Absolutely, Adam. This is a big deal. For example, if you … you know, have enough income and savings to insure your later years, absolutely, you can continue to keep that Roth IRA investment. You don’t have to withdraw money. You can leave it to your children or grandchildren and the like.
And now they will inherit tax benefits as well, because these are non-taxable distributions. But they will have to take it out within five years. But regardless, it’s a great way to move funds from generation to generation.
SEANA SMITH: And, Winnie, talking about this – I’m just looking at your notes – you’re talking about the Roth IRA, the benefits to note here – and you mentioned the clause for the first time about buying a house. Explain to us exactly what you mean.
WINNIE SUNCE: This is great. So, for a young person, or you don’t even have to be – you can be any age – but for the first purchase of a house, the Roth IRA gives you some benefits. You can actually raise up to $ 10,000 to buy a house. Here, there is one note – you must have opened this account for at least five years. But when you do, these tools can be used quite flexibly.
This is not just for your first home purchase. It can be an advance, closing costs and treated as a qualified distribution, which means you don’t have to pay income tax or early withdrawal fees – not only on a principle that you amount to, but also the profit you make from that $ 10,000.
ADAM SHAPIRO: On the traditional side of the IRA, at what age the government actually says, start taking money – we have to tax you.
WINNIE SUNCE: Well, you know, in the past, taking money out of traditional IRAs, people say, well, why do we have to do that? Well, the IRS has not yet raised money for your traditional contribution to the IRA. As it continues to grow, at some point the IRS will want a portion of your retirement savings.
So usually that number would be 70 and 1/2 – if you were born before 1949, in general. But after that, you have time until you are 72 years old. And we actually call this the required minimum distribution, or RMD for short. So, for this it is necessary to take a certain amount. And it is calculated based on your lifespan.
So, unlike Roth, where you can just let it grow, a traditional IRA, at some point you’ll have to pull out some money.
ADAM SHAPIRO: Can you contribute to a traditional IRA if you are lucky enough to earn more than the salary cap?
WINNIE SUNCE: Yes. So if you earn more than the Roth IRA salary limit, you can always–
ADAM SHAPIRO: Not Roth, traditional.
WINNIE SUNCE: That’s right. You can always contribute to a traditional IRA. But keep in mind something – a traditional IRA will always be available to you, no matter what income you earn, as long as you have income from W-2. Now– or 1099 revenue, I should say. But here’s a warning this – you could potentially deduct the tax in advance, but then you’ll have to pay the tax on the back.
There is one more thing you could consider. If your income is too high and you can’t go directly to Roth, but your heart is focused on the Roth IRA’s contribution, you could actually make a traditional IRA contribution that can’t be deducted. So, you will not refuse it for the traditional contribution of the IRA.
And then you can decide soon after that whether or not you want to perform a Roth IRA conversion, right? If you do this very quickly and no higher growth has been recorded in this portfolio, then you are not actually subject to taxes there. The money is then put into the Roth IRA – sort of like what you talked about, Adam, earlier when you did it with your previous retirement plan, your company plan – goes into conversion. So that’s an option. If you are interested in this, I would definitely consult a tax professional beforehand.
ADAM SHAPIRO: Winnie, I’m going to suggest we take you back and do a full hour webinar with you– Retired questions and answers. I really appreciate your insight. Well, I have to tell you … I was thinking about that Roth IRA I did a million years ago, I keep hearing Tina Turner in my head talking to my potential successors, you better be nice to me. Thank you very much – Winnie Sun, CEO of Sun Group Wealth Partners.