Roth IRA

Here Are 6 of the Best Roth IRA Calculators

April 23, 2020 By Tamila McDonald Leave a Comment

Roth IRA calculators are excellent financial planning tools. They can help you estimate the value of your account and see how it can grow over time. Since knowing what your Roth IRA will be worth is critical for determining in you are on target for a comfortable retirement, having a great calculator available is important. With that in mind, here are six of the best Roth IRA calculators around and an overview of their purpose.

1. Bankrate

The Roth IRA calculator at Bankrate is a solid option for retirement planning. It can estimate the value of your account at the time you retire, using a range of factors to give a better picture. With this one, you can even examine your taxable savings by plugging in your marginal tax rate.

2. Nerdwallet

Nerdwallet also has a robust Roth IRA calculator. But unlike the Bankrate one, which simply asks you to fill in a group of fields, the Nerdwallet version walks you through the process. That makes it, comparatively, more user-friendly.

3. SoFi

Another IRA calculator that is incredibly simple to use is available through SoFi. Users answer a few basic questions and get an overview of the kinds of IRA they can use. It clearly shows the maximum allowed contribution based on the input data, which can be beneficial for retirement planning.

4. Voya

If you want to see if a traditional or Roth IRA is a better option for you, this Voya calculator can help you figure it out. After entering basic details, you can review your estimated account totals at retirement as well as an after-tax comparison. It’s a simple way to explore if one approach may suit you better than another.

5. Schwab

Another comparison calculator, the Schwab version actually has fields for both the user and their spouse. This can be helpful for married couples, as it allows both income sources and spouse ages to be factored into the equation.

6. Fidelity

If you are trying to figure out if you should convert a Roth IRA into a traditional, SEP, or Simple IRA, this calculator by Fidelity can help. After going over some simple questions, users can review an analysis that shows the tax implications of the decision. That can be incredibly important for retirement planning, giving users information that can help them avoid a net loss.

Are Roth IRA Calculators Accurate?

It’s important to understand that, while the calculations made will typically be accurate, Roth IRA calculators don’t guarantee results. Some of the data is based on assumptions, such as your anticipated rate of return or expected contributions overtime. No one can be 100 percent certain when it comes to those factors. It always involves a guess.

However, that doesn’t mean a Roth IRA calculator isn’t a great planning tool. It gives you some insight into how much you could have set aside for retirement, and that is helpful. It’s just important to remember that no one knows what the future holds. Your account may end up higher or lower in the end, depending on unforeseen factors.

If you want to make sure you can meet your goal, be conservative when performing the calculations. Assume a slightly lower rate of return, for example. That way, you incidentally create a buffer in your plan, increasing the odds that you’ll hit your target before you retire.

Do you know of another amazing Roth IRA Calculator? If so, tell us about it in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Checkout The Taxation of These 4 Retirement Vehicles

March 19, 2020 By Tamila McDonald Leave a Comment

Many people want to make sure that they are financially secure during their golden years. As a result, they stash money away in various retirement savings vehicles. Thus, allowing them to have a nest egg for when they leave the workforce. However, many savers accidentally overlook a critical part of the equation: taxation of retirement vehicles. This can lead to trouble. Particularly if you aren’t prepared for what you’ll owe.

The Taxation of Retirement Vehicles

Taxation levels for retirement accounts vary. Not all sources of retirement income are subject to the same rules. It isn’t uncommon for that to lead to some confusion. Causing some to make unwise choices as they try to plan for retirement.

If you want to plan for retirement successfully. You should understand how various post-retirement income sources can be taxed is critical. Otherwise, you may find yourself with an unexpected federal tax bill at the end of the year that you’ll struggle to pay. Alternatively, you could overestimate your tax burden. This could cause you to make withdrawals or spend differently than you otherwise would. If you want to make sure that you are ready to handle retirement. Here’s a look at how four different retirement vehicles are typically taxed.

1. Social Security

Before 1983, Social Security benefits were universally tax-free. However, that isn’t the case today. While many who receive Social Security income don’t pay taxes on it, others do. If the person’s “provisional income” is high enough. They could owe federal taxes on as much as 85 percent of their Social Security benefits.

According to the IRS, a beneficiary’s provisional income has to be below $25,000 ($32,000 for married couples who file jointly) for their Social Security to go fully untaxed. From $25,000 to $34,000 (or $32,000 to $40,000 for married filing jointly), up to 50 percent of the Social Security benefit is taxable. Once you cross $34,000 ($44,000 for married filing jointly), up to 85 percent is subject to taxation.

2. 401(k)s and Traditional IRAs

Both 401(k) plans and traditional IRAs are tax-deferred. Contributions are potentially deductible the year they are made. Therefore, allowing a person to lower their taxable income by increasing their retirement savings.

However, once it comes time to make withdrawals, it’s tax time. Every withdrawal is taxed based on the person’s ordinary tax rate. This happens regardless of whether the money is from your original contributions, employer-matching funds, or gains.

3. Pensions

In many cases, a pension is funded with pre-tax income, so you don’t pay taxes on the contributions. However, like a 401(k) or traditional IRA. You’ll have to pay taxes once you start making withdrawals. In most cases, pensions are taxed by the federal government at your ordinary tax rate.

The only time that may not occur is if there are after-tax pension contributions. When that happens, the pension withdrawals that connect to that money can be tax-free. However, relatively speaking, this is a rare scenario.

4. Roth IRAs

When it comes to long-term tax advantages, Roth IRAs offer a big benefit. The contributions themselves aren’t deductible when they are made, so taxes are paid when during the year that money is earned. However, when it’s time to make qualifying withdrawals during retirement, that cash is probably going to be tax-free, including the value of your account gains.

There are some instances where a person might have to pay taxes on Roth IRA gains withdrawals. First, if you make a withdrawal of any gains before you are 59 ½ years old, you’ll be subject to taxation and early-withdrawal penalties. Second, if your account isn’t at least five years old, you aren’t eligible for tax-free withdrawals until you hit the five-year mark.

Otherwise, once you hit 59 ½ and the account is old enough, you don’t have to worry about taxes on that money. It’s that simple.

Did you consider taxation of retirement vehicles when planning to retire? Why or why not? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

This Tax Mistake Will Cost You a 50% Penalty

April 11, 2018 By Jackie Cohen Leave a Comment

Tax penalty on required minimum distributions

You may have until April 17 to figure out contributions to retirement plans, but don’t confuse it with the deadline for mandated withdrawals known as required minimum distributions (RMDs). That ship has already sailed for the 2017 tax year and if you are late or miscalculate how much you owe, you get hit with a 50% penalty on the owed amount.

Let’s back up: The money you put into a 401(k), 403(b) or other defined contribution retirement plan is not tax exempt. It’s tax deferred.

Your time to pay up comes when you take RMDs — annual withdrawals from your IRA that are taxed as income, not capital gains.

RMDs Are Annual

RMDs aren’t a one-off type of tax. They happen annually, once you turn 70.5 years old — or if you inherit an IRA and do not intend to liquidate it within five years.

Fortunately, RMDs don’t kick in on a Roth IRA during the lifetime of the original accountholder — but after a person’s death, the beneficiary who inherits the Roth would have to start taking distributions.

And no, the estate tax exemption doesn’t apply to IRAs because, again, these are tax-deferred — even though the heir isn’t the one who did the deferring, someone still gets to pay the postponed taxes.

Timing of Distributions

The first year you take the distribution, you have a bit more time to do it than in subsequent years. The deadline is April 1 following the year you turn 70.5 or inherit the IRA.

Heirs have some additional wiggle room, since they effectively have five years to decide whether to liquidate the whole IRA or change it to a beneficiary IRA.

Liquidating an entire IRA puts you into a whole new income tax bracket for the year, which usually makes annual RMDs look like a better choice by comparison.

Wait and You Pay More

Heirs who choose to wait a year or more before taking their first RMD you still have to make up for the previous year(s)’ distributions by taking care of them all with the first distribution.

Thereafter, heirs and retirees take the distribution by the end of the respective tax year, December 31`. Unfortunately, the RMD amount isn’t a static figure every year — it involves similar math to what insurance companies do.

Fortunately, you don’t need to be an actuary to get the math done — just use one of the free online calculators available on these websites:

Ask Your Financial Institution

Or if you don’t feel like messing with a calculator, you might be able to get the issuer of your IRA or your financial advisor to do the math for you every year.

Vanguard, Fidelity and other fund families offer to calculate the correct amount and notify you about it. These free services also let you opt to have the annual RMD deposited into a bank account or another non-retirement account — and you may be able to set up income tax withholding on the transactions as well.

You can also choose to have the RMD distributed in multiple payments throughout the year if you want more of a payroll type of effect, which can help you budget better.

Understand the Math

Speaking of budgeting better, you can do exactly that when you develop an understanding of what RMD math involves.

It requires you to refer to the IRS or Social Security‘s estimates to determine your remaining life expectancy — grim as it may be to consider, take the figure you arrive at from either link above and divide it into your retirement account balance as of the end of the tax year in question.

If you have more than one retirement account, you have to take a distribution from each of them, following the same formula.

Which Accounts?

However, the IRS does allow you to aggregate accounts that are of the same type — like if you have two different 401(k)s — and then you can take the distribution from one or the other if you find it easier to do so.

Double check with your accountant or financial planner before you only take a distribution from one account, because apparently this is a common type of mistake that the IRS penalizes at the 50% rate.

However, one thing you can’t do is rollover the RMD money into another retirement account — although you can put it into a taxable investment account.

You Can Start Earlier

If you want to reduce the amount of income tax you have to pay on RMDs in retirement, you could try taking distributions once you reach age 59.5.

Although you’d still owe income tax, you wouldn’t owe the penalty fee that’s normally charged on early withdrawals. This would enable you to reduce the size of the tax burden later on.

Indeed, taking withdrawals from retirement plans involves more complexity than contributing to them in the first place — but it’s worth it when you consider that your pre-tax money appreciated in value for around four decades, give or take.

And while people who inherit IRAs might find RMDs frustrating, there’s a lesson here: If you want to leave a legacy for heirs, IRAs aren’t the ideal investment product for that objective — they’re for funding retirement expenses that the ever-diminishing pool of Social Security funds can’t meet.

Readers, what issues concern you the most about planning for retirement?

Reconsider Roth IRA Contributions Over the Next Decade

March 14, 2018 By Jackie Cohen Leave a Comment

Roth IRA contributions require different decisions under the new law. Between the recent slide in the stock market and the enactment of the Tax Cuts and Jobs Act, you may want to rethink whether Roth IRA contributions make sense.

Contributions to Roth IRAs are not tax exempt but there’s no taxes on withdrawals from these accounts if they’re made at age 59.5 and up — the exact opposite of when taxation kicks in for all other types of retirement accounts.

As such, the Roth IRA primarily appealed to the young — and to an extent directly proportionate to the amount of time you had until retirement.

Rethink Roth IRA Contributions

The other rationale for contributing to a Roth IRA has gained wider relevance under the new tax law: if you anticipate having a higher tax burden in retirement than you do presently.

Most people now fall into that category because the tax cuts that just went into effect begin to sunset in 2025, at which points higher tax rates take effect.

That means that from now through 2024, you can save money on taxes by maxing out the allowed contributions to a Roth IRA — $5,500 annually for those under 50 and $6,500 for those 50 and up.

About Roth IRA Eligibility

However, eligibility to directly contribute to the Roth IRA starts to phase out among higher income brackets, making ineligible for direct contribution those who file as single earning $133,000 a year or more, married filing jointly with $196,000 annual income and married filing separately with at least $10,000 in annual income.

Notice the use of the word “direct” before “contribution” — that’s because it’s possible to make what some call a “back-door” contribution to a Roth, where you first put the money into another type of IRA and then you convert it to a Roth. These conversions are limited to the same amounts — $5,500 for people under age 50 and $6,500 for those 50 and older.

Conversions from other types of IRAs to Roth gain appeal whenever stocks in value following your original contribution — and with the markets becoming more turbulent since 2018 began, the prospect of converting other types of IRA contributions to Roth starts to look appetizing.

Last Year To Change Your Mind

If you convert another type of IRA contribution to a Roth, you have until mid-October of 2018 to change your mind and recharacterize it as the original type of contribution; this is the last year you have the ability to make this type of change.

The mid-October 2018 deadline also applies to any other type of IRA contribution you wish to reverse — something you might want to do if you see a prolonged slide in stock prices.

The ability to make this type of recharacterization also ends this year — assuming the Tax and Jobs Act doesn’t undergo additional revisions.

Meanwhile, you still have until the day that tax returns are due this year, April 17, to complete contributions to any type of retirement plan.

Talk to an Accountant

If all of this sounds confusing, ask your accountant or financial planner whether to switch any of your IRA contributions to Roth. And check out what the IRS has to say on the subject of Roth IRA contributions:

Readers, what issues have you found confusing or challenging this tax season? And do you have any concerns about whether to contribute to a Roth or other type of IRA as the stock market becomes more volatile? Please don’t hesitate to share in the comments section any questions you might have about retirement plans or taxes — we just might use them as the basis for blog posts over the next six weeks.

If you want to learn more about how tax filing has changed, be sure to check out the following articles from our archives:

What You Should Know About Roth IRA Conversions

April 21, 2017 By Doug Carey Leave a Comment

There is a lot being written about converting to a Roth IRA these days. With so much money being tied up in IRAs, it is becoming a very important question.

When thinking about converting from a traditional IRA to a Roth IRA, not only do you have to figure out how much to convert, but you also need to think about when and over how long of a time period.

When using a traditional IRA, you contribute your dollars pre-tax, and you will pay taxes only when you withdraw later in retirement. Roth IRAs are a bit different. You cannot deduct the contributions from your taxes, but when you withdraw later on, nothing is taxed.

In general, the goal is to minimize your taxes. But it’s a bit more complex than that. It also depends on the timing of the tax savings.

The Roth IRA vehicle was only created 20 years ago. It is just now starting to become mainstream. Although most people should probably not convert to a Roth IRA, it is worth it for nearly everybody to at least find out if it makes sense for them. The tax savings could be enormous.

Moving Tax Brackets

If you think you will be in a higher tax bracket when you retire, or if you know you will have very lot tax years coming up, you should definitely look into whether or not a Roth conversion makes sense.

One reason many people cite for wanting to convert a traditional IRA to a Roth is the lure of early retirement. Let’s look at a case study. We have a person, John, who wants to retire when he’s 50. The problem here is that John cannot use his IRA money (without a 10% penalty) until he’s 59.5.

This is one case where a Roth conversion can be very helpful. Here is what John can do:

Transfer all IRA money to a Roth IRA.
Pay the taxes on the transfer (you will be your marginal income tax rate on this). If possible, pay the taxes out of taxable accounts and not out of the IRA itself.
Wait at least five years and then begin to withdraw from the Roth IRA, tax-free and penalty-free.

This strategy will allow John to begin using his retirement money at age 55 rather than age 59.5 and he won’t pay the 10% penalty.

Now let’s look at running some actual numbers to see when a conversion makes sense.

Running The Numbers

Let’s look at another case study. John and Jane are 54 years old. They plan on retiring next year. They will be start receiving large pensions at age 62 and social security at age 67. Currently their federal tax rate is only 10%, but that will increase dramatically at age 62 when their pensions kick in. This is a perfect example of a couple who should probably do a Roth conversion.

With their current plan where they keep their traditional IRA as-is, they only have a 62% chance of never running out of money, according to the WealthTrace Monte Carlo simulator.

But what if they convert their entire $600,000 IRA to a Roth over a seven year period when their tax rate is low? I ran this scenario and it helps them quite a bit. The results are below:

Their probability of never running out of money jumps by 9%. Part of the reason is that their tax burden would decline by nearly 30%, as you see in the table above.

A Roth conversion is not for everybody, but for some it could be a life-saver in retirement.

Photo: CafeCredit.com

The Completely Tax Free Roth IRA: Strange Ways to Save

June 9, 2010 By Jennifer Derrick 10 Comments

SavingAdvice is starting a new column that’s going to look at strange, offbeat ways to save and make money. Anything that’s a little odd, uncommon, or contrarian is fair game – as long as it’s legal.

You probably already know about Roth IRA’s. These are IRA’s that you fund with after tax dollars and then, when you retire, your withdrawals are tax-free. In contrast, regular IRA’s are funded with pre-tax/tax deductible dollars but you pay taxes on your withdrawals when you retire. The big draw of a Roth IRA is that you pay your taxes now, at what is likely to be a lower rate than will be in effect when you retire, and then during retirement you don’t have to worry about taxes. But what if you could figure out a way to avoid taxes on both ends? Is it possible to create a Roth IRA that carries no tax burden whatsoever?

I have a friend who is trying just such an experiment. He is funding a Roth IRA with money that is not subject to taxes. He’s putting in all his gifts, money found in the street, rebates, credit card cash back, and other money that isn’t taxable income into this Roth IRA. He’s funding the account with money on which no taxes have been taken out. When he retires, he will not pay taxes on his withdrawals, either,
making this account completely tax free. So far he’s managed to accumulate about $5,000 in this IRA, including the interest he’s earned from his investments. With about twenty years to go until retirement, he could have a nice chunk of money in this tax-avoided account.

Is such a thing ethical? You could argue it both ways. You could say that he is cheating the system by operating against the spirit of the Roth rules. However, I would say he is being smart. He is careful to make certain that the money he puts into this account is not subject to taxes, so he’s not breaking any laws to my knowledge. He’s putting his gifts and found extra money to good use. Rather than dropping this non-taxable money into a regular savings account where the earnings are subject to taxes, he’s using it to best advantage, protecting any earnings from future taxes.

Now, obviously my friend does not intend to retire on just this money alone. It would be nearly impossible to gather together enough tax-free money to provide a comfortable retirement. Unless you have a lot of people giving you big gifts, you need another plan. My friend has other retirement accounts that will provide the bulk of his income. This is merely his attempt to “stick it to the man” by avoiding taxes on his retirement income as much as possible. When he retires, he will have a least a small amount of money on which he has never and will never pay taxes.