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5 questions to ask before opening a Roth IRA

  • Roth individual retirement accounts are becoming more popular as savings vehicles but are still overlooked by many who might benefit from them the most.
  • If you expect to be in a higher tax bracket after retirement, a Roth IRA may be a good fit for you.
  • As contributions to a Roth IRA are made on an after-tax basis, savings are available for withdrawal before — under certain circumstances.

Determining which retirement savings vehicle provides the most freedom and best features can seem daunting.
gradyreese | Getty Images
Determining which retirement savings vehicle provides the most freedom and best features can seem daunting.

There is an endless list of tax-advantaged accounts and plans on the market for consumers to choose from, so determining which plan or vehicle provides you with the most freedom and best features can seem, at first, like a daunting task.

A good jumping-off point is to start asking yourself basic questions like: "Where will my career take me in 20 or 30 years?" or "How likely is it that I will need access to the funds I'm setting aside for retirement before I actually do retire?"

Though these questions seem broad in scope, they can truly help you to narrow your options, and they may point you toward a retirement tool that is rising in popularity but still may be overlooked by many Americans who could benefit from it most. A Roth individual retirement account may be just what is missing from your current retirement plan. Read on for the five questions you should ask before opening your Roth IRA.

1. Are you expecting higher taxes in the future?

If you are at the mid-point of your career or if you are currently a mid- to high earner and fear that slowly, but surely, your taxes will be raised over the next few decades, you are an excellent candidate for a Roth IRA. When you make contributions to your Roth IRA, you make them on an after-tax basis.

However, when receiving qualified distributions from the account, these distributions will be received completely free of taxes. This tax-free treatment of distributions includes contributions you've already made, but also any investment income, dividends and capital gains your account would have enjoyed as a result of years of accumulating, investing and compounding.

2. Are you currently an active participant in your employer's plan?

One drawback of the traditional IRA is that if you are single, earn more than $62,000 and are an active participant in your employer's plan, your ability to make deductible contributions phases out. If you earn over $72,000, you won't be eligible to make a deductible contribution at all.

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The Roth IRA, however, provides an active participant with limits on earnings that are much higher than that of a traditional IRA. (The phase-out range for a Roth is between $118,000 and $133,000 if single and $186,000 and $196,000 if married.) Because contributions to a Roth are never deductible, your active participant status has no bearing on your ability to make contributions to your Roth IRA. Coupling your employer's plan with your own individual Roth IRA can give you a great way to maximize your retirement savings.

3. Do you want to delay tax advantages as long as possible?

With longevity increasing year after year, outliving retirement assets is a common concern. Many who have traditional IRAs wait until they are forced to take minimum distributions from the plan (April 1 following the year you turn 70½). That way, they can delay the tax advantage for the longest time possible.

Another large advantage of the Roth IRA is that there are no required minimum distributions for the lifetime of the taxpayer. This means the taxpayer can elect to keep the assets growing in the account until their death and have the opportunity to pass a sizable estate to their heirs. If they end up living longer than expected, they can always draw qualified distributions from the account after reaching the age of 59½, just like a traditional individual retirement account.

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4. Seeking tax diversification?

An overlooked advantage of saving for retirement with a Roth IRA is the tax diversification that you receive as a taxpayer. If you only utilize traditional tax-deferred types of retirement savings during accumulation, you may be limiting yourself when it comes time to retire, drawing down assets, and leaving an estate to your loved ones.

Making contributions on both a pretax (401[k], traditional IRA, defined benefit plan) and after-tax basis (Roth IRA, Roth 401[k]) can open you to more options when it comes time to make qualified distributions, delay tax-advantages longer, take advantage of a current tax deduction or make the payment of estate taxes for your beneficiaries easier.

"One drawback of the traditional IRA is that if you are single, earn more than $62,000 and are an active participant in your employer's plan, your ability to make deductible contributions phases out."

5. Need the ability to withdraw funds before you retire?

Having funds to pay for an unforeseen financial hardship, such as a disability or a large expense, can be a vital aspect of the financial-planning process. Because contributions to a Roth IRA are made on an after-tax basis and as long as five years have passed since your first contribution to the account was made, you may withdraw funds up to the amount of contributions you've made if the distribution is a qualified distribution under IRS rules. After you reach age 59½ and have satisfied the five-year rule, all distributions from the account will be considered qualified and are therefore received tax-free.

(Editor's Note: This column previously appeared on Investopedia.com.)

— By Joshua Markowski, financial advisor at Markowski Investments

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