A Roth IRA is a retirement savings account that you set up for yourself, as an individual, rather than one that is set up for you by your employer, e.g., a 401(k) plan. Money contributed must be after-tax dollars. Although there is no tax benefit today, as with a traditional IRA or 401k plan, the contributions, interest and other earnings grow tax-free, and can be withdrawn tax and penalty free, provided you meet the rules described below.

A Roth IRA is an ideal savings option for anyone who would benefit from tax-free withdrawals in the future. In many cases, you can even open one for your children if they have some earnings. It can be an ideal tool to prepare them monetarily for the future, since whatever money they contribute will grow as long as the account is open. The Roth IRA is particularly beneficial for those that expect to be in a higher tax bracket, especially in retirement, when issues about tax-brackets, social security benefits and Medicare tax burdens may emerge.

Providence Association offers Roth IRA with a current 3.00% annual rate.

With a Roth IRA, there are no contribution age restrictions or compulsory withdrawals, i.e., Required Minimum Distributions (RMDs); even in retirement, after age 70½, you may continue to make contributions, provided you still have earnings and meet the income limitations.

Roth IRA Limits

The limitations on the amount you can contribute annually into a Roth IRA are outlined below. It is important to know that if you own a Traditional and a Roth IRA, aggregate contributions into both cannot exceed the stated annual limitations. The income limit changes from year to year so check the IRS’s website to learn what those limits are. 

Contribution Limits:

For the year 2021, taxpayers under 50 years old may not contribute more than $6,000.00, while taxpayers over 50 can contribute up to $7,00.00.

Income Limits:

Not everyone is eligible for this type of retirement account. If you make too much, you are out of luck. So take advantage now, if you can. In the year 2018 the limitations are as follows:

• Married taxpayers filing a joint income tax return cannot contribute into a Roth IRA, if their combined Adjusted Gross Income (AGI) exceeds $124,00 (in 2020); and $125,000 (in 2021
• The amount of the permitted contribution is gradually phased out where the joint AGI is between between $204,000.00 and $224,000.00 (in 2020); and between $205,000 and $225,000 (in 2021);
• Single taxpayers’ AGI limits are $124,001 – $139,000;
• Married taxpayers filing separately have severe restrictions of $0 – $10,000.

TIPS:

• If your employer offers a Roth 401(k) there are no income limits; you can certainly use that to put away after-tax dollars for retirement.

• Also, if you are on the cusp of the income limit, consider increasing your pre-tax 401k contributions. This will decrease your taxable income and your overall AGI in that year, and should, therefore, re-qualify you for the Roth IRA.

When to contribute

You have until the tax filing deadline of the current year to make contributions into your Roth IRA for the previous year, but the smartest option is to invest early, because the longer your money is invested, the more it will grow.

Roth IRA – Rules for Withdrawal

For unlimited tax-free and penalty-free withdrawals, keep the Roth IRA in place for at least five years and avoid it until retirement, or at least after age 59 ½. 

It is obviously best to keep the money invested until retirement, you will definitely need it later. Depending how much you save, it may be for everyday needs, a nice trip somewhere, or maybe to provide traditional family vacations to Wildwood. The sooner you start investing, the more chance you have to save enough for all of the above.

Still, Roth IRAs have relatively relaxed rules for withdrawing money early, which gives the investor peace-of-mind, in case something unexpected occurs.

Withdrawals of principle, or the contributions made, are allowed at any time, without tax or penalty, because you have already paid taxes on that money.

Withdrawals of earned interest and other income

Non-qualified withdrawals will be subject to a payment of income taxes and a 10% excise penalty tax.

You can withdraw tax and penalty free if:

• the account has been open for at least five years
• you are at least 59½ years old, or
  • dead and your beneficiaries are receiving the distributions from an inherited Roth IRA)
  • permanently and totally disabled
  • using up to $10,000 toward a first-home purchase

If you have not held the Roth IRA account for five years, but are taking the distribution under one of the items listed above, you may do so without penalty, but Uncle Sam still expects to be paid taxes on the interest and other earnings.

There are also some other exceptions that allow for early distributions without penalty. In these situations, the account has to be open for five years and you will need to pay taxes on the earnings and interest. These exceptions include:

• qualified education expenses
• medical expenses
  • that exceed 7.5% of your adjusted gross income for the year
  • or if unemployed, to pay health insurance premiums
• qualified reservist distributions (for members of the military reserve called to active duty)
• taking a series of substantially equal lifetime distributions
• an IRS levy

Next Step

Providence Association offers Roth IRA accounts that pay interest at the current rate of 3% annually. This rate will always compare favorably with standard CD’s and we guarantee a minimum of 2%, no matter how low CD rates might go in the future.

IMPORTANT NOTICE: FOR Additional important information (inter alia, Contribution, Adjusted Gross Income and other Limits and Qualifications) Affecting Your IRA, SEP IRA and Roth IRA Savings and Contributions for 2020 & 2021 (Click: Download Guide)

Click to read more about the benefits of Roth IRA and Traditional IRA accounts. 

Feel free to contact us for more information.

Disclaimer: This article is not intended as a substitute for legal, tax, financial, retirement, investment or other counsel or professional services and is not meant to be exhaustive of its topics. While precautions have been taken to make this article accurate, no responsibility is assumed for errors or omissions, or for damages resulting from the use of the information. Also, this information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Providence Association recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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How much is Enough?

How much is enough to live the life you want during retirement?  A good question to ask yourself at any age, but difficult to know early in life.  If you have spent the last ten, twenty or thirty years working full time, you may think that your retirement savings are well ahead of what you may actually need.  

According to Penny Hoarder, only “27.5% of people ages 21 to 34 have a retirement account” If you save $100 each month starting at age 25, and your retirement account grows by 5% each year, you will have nearly $172,000 by the time you are 67, but if you wait another 10 years, then you will only save just under $95,000.  By the time you are 50, you should save at least six year’ worth of your salary. 

That being said, f you have not started saving for retirement, call us to open an account policy.  In 2019, the maximum annual IRA contribution is $6,000 for people under 50; it’s $7,000 for people 50 and up. If you start contributing $6,000 a year at 37, and your account grows by 3.25% annually, you will have $307,000 by the time you’re 67. Also if you have enough to make additional contributions that exceed the annual maximum or an IRA and Roth IRA, our, tax-deferred, annuities have the same interest rate structure.   

Experts generally agree that we need at least 70% of our pre-retirement income to live comfortably during retirement. Of course, everyone has a definition of comfort, so 70% may not be enough – or, in some relatively rare cases, it may be more than enough. However, it is clear that any retirement savings plan must begin with us asking ourselves: “What do I want to do with the rest of my life?”  This vision, this dream, should then fuel our efforts to save enough.

Retirement Dreams

In this article, we offer a few scenarios with estimates to give you a better idea of how much you need when the time comes.  In each case, individually tailored savings plans are important. Providence can help you design an appropriate plan based on your current situation as well as your idea of the retirement dream. 

The scenarios presented assume that the couple has a pre-retirement income of $80,000, expects a pension of $28,000 annually and will spend all its retirement savings during their lifetimes. Obviously, if they want to do more, such as helping grandchildren with college or leaving a legacy, they will need to save more. The figures also assume a 6% rate of return on investments and a 3% inflation rate.

The Homebodies

This couple views retirement as a time when they can relax and enjoy each others’ company. They will work in the garden, do charitable work and read good books. The mortgage will be paid off and the kids will be out of college. No plans of any extra expenses as far as travel or purchasing fancy cars or boats. 

• How much is enough: 70% of their pre-retirement income, or $56,000 annually.
• Savings needed with pension: $432,000 for $28,000 annually
• Savings needed without pension: $864,000 for $56,000 annually

The Snowbirds

This couple is much like the homebodies, and view retirement as one long vacation. However, rather than stay at home, they spend their winters in the Sunbelt. Whether they purchase a condo, or rent, their retirement will have to be higher than the 70% mentioned above. 

• How much is enough: 90% of income, or $72,000 annually.
• Savings needed with pension: $679,000 for $44,000 annually
• Savings needed without pension: $1.1 million for $72,000 annually

The Globetrotters 

This couple sees retirement as the beginning of a bold new chapter in their lives. They plan to travel the world – all of it: Argentina in Spring; The Alps in summer; Tuscan and the Riviera in Fall; and Bali in Winter. Oddly enough this hectic schedule requires earnings greater than those enjoyed in pre-retirement years. 

• How much is enough: 110% of income, or $88,000 annually.
• Savings needed with pension: $926,000 for $60,000 annually
• Savings needed without pension: $1.36 million for $88,000 annually

The Part-Timers 

This is the couple who finds joy in their job; it gives them a sense of purpose. They would feel lost not doing what they love so they plan on working twenty hours per week, thereby earning some additional income in the process.

• How much is enough: 50% of income, or $40,000 annually.
• Savings needed with pension: $185,000 for $12,000 annually
• Savings needed without pension: $617,000 for $40,000 annually

Reality – Life is Expensive

Now lets look at reality, life is expensive. You may fit the Homebodies category, but there are things that you want to possess to be comfortable.  For example a nice pool, or a vacation home on the beach for your grandchildren to visit during the summer. Or maybe you may want to sponsor a family vacation to a nice resort in the Poconos. You may want to donate to churches or charities. You may even like fancy clothes, purses, TVs or computers.  Just because you are retired does not mean that you should not be able to buy yourself some toys. There is also the possibility that you want to be a Homebody now, but when you get to retirement, your dream may change. So in reality, you will need to save more than the above amounts to have a little extra wiggle room.  

Retirement Expenses

The above calculations do not take into account some major expenses that you may encounter in retirement, including healthcare costs, existing debt, and taxes.  According to an article in the Motley Fool, “retirement healthcare costs range from $285,000 to over $363,000 for a 65-year old couple retiring in 2019.”  Also, taxes do not go away during retirement. Unless you saved exclusively in Roth Accounts, for instance, you will be taxed by that year’s tax brackets on amounts you withdraw from your retirement accounts. Taxes will also be due on your pension, property, investment, dividend and other income. 

It is absolutely possible to reach your retirement goals if you start investing your extra income today.  Although there are many investment opportunities, an IRA, Roth IRA or annuity are guaranteed forms of retirement saving that bear no risk. So even if you decide to be a bit risky with your investments, it is a good idea to place a significant portion of your retirement savings into these plans.  This way, no matter what happens with the stock market, you will still have enough to live your retirement dream.

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The Providence Association’s so-called flexible premium deferred annuity currently pays an interest rate of 3.25%. Although it can vary over the course of years, this rate of return will most likely always compare favorably with bank CDs.  And Providence guarantees a minimum interest rate of 3%, regardless of what CD rates might do in the future.

Moreover, Providence’s annuities are completely tax-deferred ‘ i.e. the investor pays no income taxes on interest, until withdrawals are made, regardless of how many years go by from the time of an initial deposit. This raises an annuity’s effective growth rate of interest to 5.30% (depending upon your tax bracket), levels that CDs cannot approach. The tax savings are further compounded in instances where the accumulation of wealth occurs while the investor is in a higher tax bracket and makes withdrawals in later years, after he has reached a far lower tax bracket.

Unlike CD’s Providence annuities allow for initial investments of only $300 and future deposits at the investor’s discretion and timing (there is a $50 minimum on future deposits). There are no renewal date concerns or worries. One can set a deposit schedule during an annuity’s accumulation phase, kt need not honor it. Deposits are completely flexible.

Because annuities are longer term savings and retirement vehicles, there is a penalty for withdrawals before the age of 59.5 and an annually decreasing surrender charge on withdrawals of over 10% annually, during the first six years. However, the fact that annuities are designed for accumulation of longer term investments makes these ‘limitations’ irrelevant.

Annuities are a great place ‘to park’ larger sums of money that investors might receive from inheritances, insurance policy or other endowments or retirement buyouts.

At the appropriate time, the insurer can design a suitable monthly payment schedule to the investor, during a carefully calculated guaranteed payout period. This relieves the investor of worries about monthly budgeting. Or, the investor can make his own withdrawal plan or schedule at the appropriate time ‘ after turning 59.5 and after the annuity is in place for six years.

Another great use for annuities is as a retirement savings vehicle. The younger investor can regularly make deposits and watch his accumulations grow tax free.

Withdrawals can then be made on a pre-determined schedule or at the investor’s discretion. Annuities are also a superior means for giving employees deferred income benefits.

Should the investor die, his monies will go to a designated beneficiary. Should he become disabled, surrender charges and penalties are waived on the accumulations.

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IRA’s – The federal government has increased the deposit limit for income earners under the age of 70.5 to $5,500 (for persons over 49 years old, this amount is higher: $6,500) for the tax year 2017. A similar deposit can be made for the income earner’s spouse. Such deposits generate a deduction on the investor’s tax return and interest earnings accumulate tax free. Although withdrawals are subject to income tax, they are usually made after the investor has retired and is in a lower tax bracket. Withdrawals before age 59.5 incur a 10% excise tax penalty and are subject to ordinary income tax with several exceptions noted below. The proceeds from 401(k)’s or other qualified pension plans, upon distribution, can be easily “rolled-over” into a Providence IRA.

Roth IRA’s – Although deposits into Roth IRAs are not tax-deductible, withdrawals after age 59.5 and 5 years are completely tax-free. If a person owns an individual IRA and a Roth IRA, combined contributions into both cannot exceed $5,500 ($6,500 for persons over 49 years of age) in the year 2017.

IRA Withdrawals – The 1997 Tax Relief Act allowed withdrawals from all IRA’s in the following circumstances: 1.) For tuition for higher education; and 2.) For qualified first-time homebuyers ($10,000 maximum. In addition, withdrawals from traditional IRA’s are permitted to cover long-term disabilities and excessive medical expenses stemming from illnesses without a prognosis of recovery.

Supplemental Annuity – Although IRA’s and Roth IRA’s are wonderful vehicles for retirement savings, because they generate either tax deductions or tax-free distributions, respectively, their greatest limitation stems from the restrictions on the amount of annually permitted deposits. A wise investor will also purchase a Flexible Premium Deferred Annuity for the purpose of accommodating additional retirement income and/or wealth for future generations.

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