Why You Might Want To Contribute To A Roth IRA By July 15th

Hands holding piggy bank with Roth IRA. Pension plan.

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We’re a few days away from this year’s tax deadline on July 15th. It’s also the deadline to make contributions to an IRA for 2019. Contributing to a Roth IRA can be particularly beneficial. (If your income is too high to contribute to a Roth IRA, check out this back-door method to get around the income limits.) Here are 12 reasons why:

1) You don’t have to make changes to your tax return. Unlike an HSA and possibly a traditional IRA, Roth contributions aren’t tax-deductible, so they won’t alter your tax return if you’ve already filed it for 2019. Just be sure the contributions are coded as 2019 rather than 2020 contributions.

2) You still have access to your contributions. Unlike HSAs and traditional IRAs, you can withdraw the sum of your Roth IRA contributions at any time and for any purpose without tax or penalty. That means if you have some money sitting in a savings account for emergencies, you might as well put it in a Roth IRA since you can still access the contributions if you need to.

You would just need to fill out a withdrawal form, which can actually discourage you from spending the money frivolously. Be aware that if you withdraw any earnings, they may be subject to taxes plus a 10% penalty if you’re under age 59½ or haven’t had the account open for at least 5 years, but all the contributions come out first. If your Roth IRA is in cash, there probably won’t be much in earnings anyway given today’s low interest rates.

3) You have a lot of investment flexibility. Unlike your employer’s retirement plan, you’re not limited to a fixed number of investment options. You can generally open a Roth IRA at your favorite financial institution and invest it in everything from an FDIC-insured savings account to individual stocks. In a self-directed Roth IRA, you can even invest in gold bullion, direct real estate, and a small business.

4) You can use the earnings tax-free for a down payment on a home. In addition to withdrawing the contributions tax and penalty-free, you can also withdraw up to $10k of earnings penalty-free towards a home purchase as long as you haven’t owned a principal residence in the last 2 years. If you’ve had the Roth IRA for 5 years, those earnings would also be tax-free.

5) You can use it for education expenses. Earnings can also be used penalty-free for qualified education expenses for you, your spouse, your dependent children, or your grandchildren. Since it’s considered a retirement asset, the account balance is generally not counted against you in calculating eligibility for financial aid. However, withdrawals from a Roth IRA do count as income for purposes of financial aid so be careful in which years you take the distributions.

6) Your money can grow to be tax-free for retirement. Speaking of retirement, the main benefit of a Roth IRA is that any earnings you don’t withdraw will eventually be tax-free as long as you’ve had the account for at least 5 years and are over age 59 1/2. This can help you avoid higher tax brackets.

For example, taxable income up to $80,250 for a married couple filing a joint return is currently taxed at 12% or less (based on 2020 tables). Any income over that amount will be taxed at 22% or more. If a retired couple has $90k of taxable income, they could reduce it to the $80,250 limit by dipping into their tax-free Roth IRA(s) for the remaining $9,750 of income and avoid moving into the 22% marginal tax bracket. This would be even more beneficial if tax rates go up in the future.

7) You start the 5 year period now. Did you notice all the references to the account having been open for at least 5 years? Well, even if you can only afford to contribute a minimal amount, just opening the account starts the clock ticking towards the end of those 5 years.

8) It can make you eligible for more health insurance subsidies in retirement. That’s because the subsidies in the Affordable Care Act (assuming it’s still in place) are based on your modified adjusted gross income, which does not include tax-free Roth IRA distributions. This could make a big difference in the price of your premiums if you ever purchase insurance through the law.

9) It has protections from creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, an inflation-adjusted $1,362,800 in total IRA assets are protected from bankruptcy this year. Most states also extend protection for Roth IRAs from creditors outside bankruptcy as well.

10) You don’t have to take required minimum distributions (RMDs). With other retirement accounts—including Roth 401(k)s—you eventually have to start taking a minimum amount out each year. With a Roth IRA, you can leave the money in there to continue growing tax-free as long as you like.

11) There are estate planning benefits. When you pass away, your Roth IRA can pass directly to your beneficiaries without going through the time and expense of probate. Your heirs can then continue to benefit from tax-free growth by stretching the distributions over a period of time.

12) It’ll make you feel better about yourself. Admit it. Doesn’t the sound of having a Roth IRA just make you feel more financially responsible?

The earlier you contribute, the longer your money can grow to be potentially-tax free and the longer you’ll enjoy these other benefits as well. So if you haven’t contributed to a Roth IRA for 2019, you have about a few days left. What are you waiting for?

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