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There are many reasons to celebrate a Roth

A group of smooth stones depicting retirement zen

A Roth savings option can and should be a part of a retirement planning conversation. This is especially common among people who are early in their careers. But wait! That doesn’t mean there aren’t benefits you can gain if you’ve been in the workforce for decades or are near retirement.

What is a Roth savings vehicle? It’s an opportunity to put after-tax money into a retirement savings account. Yes, you give Uncle Sam his portion today. But, if you hold this account for five years and you are age 59 1⁄2, you can withdraw all of your investment gains tax-free. You can also gain tax-free withdrawals upon disability or death as long as the account has been held for five years prior to these events.

What does this mean for your future? If you save $20,000 in your Roth and that account is worth $40,000 at retirement, you have $20,000 in earnings that will not be taxed. That’s why this option is so appealing to younger savers. The time horizon for saving is longer, allowing larger earnings growth.

Why would a person closer to retirement want to use a Roth savings option? Tax diversification. All of your career has been spent saving on a pre-tax basis. In retirement, you are going to be subject to income tax on your withdrawals. This may impact the taxation of your Social Security benefits. Therefore, some individuals are using a Roth account to offset taxable distributions in retirement.

Here are a few more tidbits about Roth savings:

• Roth IRA contributions may be limited by your earned income, so if your employer offers a 401(k) plan with a Roth option, strongly consider it. Your employer may match these contributions, the contribution limit is higher than a Roth IRA and there is no earned income limit.

• If you have a Roth 401(k), open a Roth IRA with a small contribution five years before you retire. If you roll over your Roth 401(k) at retirement, your clock resets and you have to wait five more years before withdrawing funds without a penalty. If you already have a Roth IRA established and the five-year requirement is met at the time you roll over your 401(k) account, there is no need to wait another five years.

• Can you use Roth IRA savings for college education? Yes! With a Roth IRA, your after-tax contributions are distributed to you first. As long as you do not dip into the investment gains, you can use your contributions to pay for college expenses without incurring taxes or penalties and keep your earnings for a tax-free distribution at retirement.

This is just a quick overview of the Roth savings option. If you are interested in a Roth, our local investment professionals  are happy to work with you on your unique needs.

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