For those about to Roth

When planning for the future, one of the most challenging issues that people face is the prospect of retirement.

Many worry about how they will fund their retirement and at what age will they finally be able to stop working and enjoy all of the money that they have been saving for the “golden years.” Today, there are an abundance of different options to help people better prepare for the future.

Since it is nearly impossible for anyone to predict their financial standing at retirement time, retirement plans such as 401(k)s and Traditional IRAs can often seem like a gamble with one’s future. While both retirement plans are tax deductible at the time of contribution, upon distribution the retirement money is taxed according to the individual’s tax bracket at the time. The uncertainty of not knowing whether the individual might move up in the tax brackets and end up paying more taxes, leads many people to choose a more stable option, also known as a Roth IRA.

On Jan. 1, 1998, the Roth IRA was introduced as a part of the Taxpayer Relief Act of 1997, which served to reduce several federal taxes.

The contribution maximum originally began at $2,000 and later rose to today’s limit of $5,000, but it is important to note that the number varies according to filing status and income. Different from the 401(k) and Traditional IRA, a Roth IRA does not provide tax deductions upon contribution; rather, the individual is taxed at the tax rate when the money is placed into the retirement fund. However, assuming certain requirements are met, all of the interest and earnings made on the money in the Roth IRA account are tax free. Therefore, upon withdrawal, the individual is entitled to the full monetary value of the account, because taxes were already previously deducted.

Another benefit of the Roth IRA is the flexibility of withdrawals. Both 401(k)s and Tradition IRAs have a penalty fee of 10 percent for early distributions from a retirement plan. However, the Roth IRA is not constrained by the same strict rules. An individual is allowed to withdraw the entire value of the original contribution without any penalties. All earnings are also tax free upon withdrawal on condition that the individual is over 59 1/2 years old and the Roth IRA account has been established for at least five years.

Unlike the minimum distribution requirements for 401(k)s and Traditional IRAs, Roth IRAs do not have a minimum distribution requirement. For 401(k)s and Traditional IRAs, after the age of 70 1/2, individuals are required to begin receiving distributions even if they are not yet retired. However, Roth IRAs do not require distributions at any point, so individuals can leave their money in the Roth IRA account and can continue to earn tax-free interest indefinitely. This feature of Roth IRAs also means that the accounts are inheritable and can be left behind as assets even after the individual has died.

Beginning in 2010 another benefit made Roth IRAs especially attractive. Traditional IRAs and other retirement plans, such as 401(k)s, can be rolled over into a Roth IRA account. Originally, individuals whose income exceeded $100,000 were not allowed to convert their retirement plans into Roth IRAs. However, after the changes made in 2010, high income individuals now have the option to make the switch.

With the current recession, many people have lost over 30 percent of their current retirement money. However, with the prospect of a rising economy, now is the most ideal time to switch from Traditional IRAs and other retirement plans, such as 401(k)s, to a Roth IRA. Contributions made to Traditional IRAs and 401(k)s are not taxed, therefore, when making the switch, the individual is taxed at their current tax rate. Due to the loss of retirement assets, the amount of money that is to be taxed will probably be less in the current economy. However, once the switch is made, the Roth IRA continues to grow tax free. This is beneficial because as the economy improves and individuals recover their losses, they will not be taxed on their gains. When rolling over other retirement plans to a Roth IRA, the goal is to make the transition when the individual is in the lowest tax bracket possible, therefore, paying the least amount of money in taxes.

A Roth IRA provides a sense of stability that other retirement plans cannot offer. By paying taxes at the time of contribution and earning interest tax-free, individuals can better prepare for their future. However, the ability to withdraw the original contribution without penalty is a feature that allows individuals to feel secure about their decision to place money in a Roth IRA account, because if unforeseen circumstances occur, there is no punishment for taking out the necessary money. A Roth IRA allows individuals the flexibility to live a prosperous life while also planning for an enjoyable future.

— Rob Hoxton CFP®, AAMS, AIF® is the president and CEO of Hoxton Financial, Inc., a leading fee-only investment advisory firm. He began his career in the financial services industry in 1986, and he has won numerous awards for his work in the wealth management area. Mr. Hoxton is the developer of The Grow Greenr® Method and the author of Grow Greenr, 10 Steps to a Richer Life, which is available at and Investing in Uncertain Times, which can be downloaded as a PDF file from He can be reached at and by phone 304-876-2619.

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