By: Don Meyer
The COVID-19 pandemic has caused us all to change how we do things. Looking at our retirement strategy should be something we revisit as well.
Millions of people lost their jobs, lost income, and industries that everyone used to think of as secure were hit hard.
One thing became clear: Americans were short on emergency funds. The government has done their best to bridge the gap but ultimately it is still up to each of us to make sure we are taken care of.
Here are a few reasons why Roth IRAs could be good to consider amidst and after COVID…
SUPPLEMENT EMERGENCY FUNDS
Because contributions to a Roth account is made with after-tax dollars, you can withdraw your contributions at any time without penalty or taxes. Only the earnings in your Roth account are not available to use until 59 and a half.
That means you could use Roth IRA or Roth 401[k] contributions as a supplement to your emergency funds. Now look, withdrawing from your Roth account is still a last-resort option, but it’s better than pulling from a traditional 401[k].
LET’S TALK ABOUT TAXES
One of the main reasons people use Roth accounts is because the distributions are tax-free. Having a tax-free source of income is a nice layer of protection against future income tax increases.
The government has used trillions of dollars on COVID-19 stimulus programs and those funds are going to be recovered somehow and there is only one way the government has to generate revenue. You guessed it. Taxes.
It is highly likely that taxes will be higher in the future and having a tax-free source of income can make a huge difference.
I even use a strategy where I help people significantly reduce taxes in retirement by hundreds of thousands of dollars, increase retirement income by 60% to 100% a year, all without market risk.
CONTRIBUTING TO A ROTH IRA OR ROTH 401[K]
First, you should know there are contribution limits for Roth accounts. If you’re below age 50 the maximum amount you can contribute is $6,000. Over age 50 and you can contribute $7,000 a year.
There are also income limitations. If you’re single, then you have to make less than $124,000 in Adjusted Gross Income [AGI] to qualify for the full contribution. You can make a partial contribution if your income is between $124,000 and $139,000.
For the joint filers out there, you must be making less than $196,000 for the full contribution but below $206,000 of the partial contribution.
If you have access to a Roth 401k or designated Roth account within your traditional 401k, your contribution limits are much higher. There are no income restrictions, either. In 2020, total 401k contributions, including Roth and traditional deposits, are capped at $19,500, or $26,000 if you're 50 or older. Your employer-matching contributions don't count against those limits.
ROTH ROLL OVERS
If you make too much money to contribute to a Roth, there is another option. You can use money from your traditional IRA and convert it to a Roth.
With taxes being low now, this is a great time to consider this. However, you must consider if using funds from your traditional IRA will increase your income taxes the year you take the money out.
There are other factors to take into consideration when evaluating this as an option and that is what we do. This option could end up saving you hundreds of thousands of dollars in the future, especially if taxes go up.
DIVERSITY AND SECURITY
If COVID has exposed a lack of emergency funds for you, your first order of business is to start building your cash savings. Then, you can increase your contributions [or redirect money that was going to a traditional IRA] to a Roth account.
This will give you some tax diversification and security from future tax increases. This way, when the next crisis hits you won’t have to dip into traditional accounts until you are ready to retire.
WHAT THE PROS DO
I don’t know about you, but I tend to look at the people in the top of their field to see what they are doing. If you want to know what myself and my counterparts are doing in these uncertain times to secure our standard of living in retirement, give me a call or email us and we will be happy to share it with you.
ABOUT THE AUTHOR: Don Meyer is the President & Co-Founder of Both Hands Financial Group. He is Investment Advisor Representative and licensed insurance advisor. That means that he can do what is in the client's best interest because he believes, like we all do at Both Hands FG, that insurance and investments work together. Don and his wife, Jenna, have 10 children and three grandchildren. He enjoys being very active, kayaking, wood working, and volunteering.