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Roth IRAs – The Swiss Army Knife in Your Financial Belt

Tthere are many money-saving vehicles, but few are as flexible as the Roth IRA. You can have pension savings, emergency money and college savings in one convenient place. Let’s explore these options in more detail.

Retirement savings

What is a Roth IRA? In its most basic form, it is a pension savings account in which contributions are made in cash after tax, and all qualified cash withdrawals after 59 1/2 years are non-taxable. Although contributions to the Roth IRA are not tax deductible, the IRS sets rules about who can contribute and how much. In 2021, contributions are limited to $ 6,000 per year ($ 7,000 for those over the age of 50) for individuals whose income (or income combined with spouse’s income) falls below certain thresholds. Having Roth available for retirement provides flexibility to those who want to manage their tax burden during their non-working years.

Urgent money

A lesser known fact about Roth IRAs is that you can always withdraw your contributions at any time for any reason – without asking questions and, best of all, without taxes or penalties. For example, suppose you have contributed a total of $ 20,000 to the Roth IRA over the past five years, and the account has grown to $ 30,000. If your house needs urgent repairs, you can raise up to $ 20,000, and the remaining $ 10,000 will continue to grow without taxes until retirement. Be sure to report and track your contributions each year you file taxes.


Education costs

Under normal circumstances, an unskilled withdrawal of part of the Roth IRA’s growth would result in taxes and a 10% penalty. There are a few exceptions to this rule – one is the use of money to pay for college (or other qualified education costs). You would still owe the usual income tax on any earned earnings, but you would avoid the penalty. Let’s go back to our example of a $ 20,000 contribution and a $ 10,000 growth. If the tuition is $ 25,000, you could raise $ 20,000 tax-free and pay the usual income tax on the remaining $ 5,000 withdrawn from the Roth IRA. There is also the possibility of establishing a Roth IRA on behalf of the child before he or she reaches college, but he or she should have an income equal to or greater than the amount of the contribution.

This article only scratches on this topic. More advanced strategies are available because they apply to those who would not normally qualify due to income constraints. If you are interested in exploring the possibilities, contact us and see how to take advantage of this valuable tool.

For more information, visit contwealth.com

David Rath, CFA, is the Director of Portfolio Strategies at Continuum Wealth Advisors in Saratoga Springs.