Should You Convert to a Roth IRA?

Roth IRAs are very popular alternatives to traditional IRAs, which have more restrictions than a Roth. Like any other IRA, the Roth allows investments to grow tax free, explains the article “7 Mistakes to Avoid With a Roth IRA” from U.S. News & World Report. Understanding how the Roth works will help make the most of assets in the account, including avoiding common pitfalls.

Some of the more common mistakes made with Roth IRAs:

Not asking if Roth IRAs are safe. Account owners may contribute up to a certain amount every year as long as they meet the eligibility requirements. Funds may be allocated to different types of investments, including stocks, bonds, exchange-traded funds and mutual funds. Funds placed in a Roth IRA are after-tax dollars—the funds have already been taxed as income when placed into the account. Investment gains and withdrawals are tax-free, which is part of the appeal of the Roth. They are considered relatively low-risk investments.

Can you lose money in a Roth? Any investment account can lose money depending upon the investments you select. Be sure that investment accounts are allocated according to your risk tolerance.

Don’t access funds earlier than permitted. Once you turn 59 ½, you may make withdrawals. Taking out funds earlier may generate taxes and penalties. Sometimes, you might qualify for a hardship withdrawal if you lose your job or have high medical bills not covered by insurance.

Not having earned income. One of the requirements for using a Roth is that the owner must have earned income in the calendar year of the contribution. For example, if you open a Roth IRA for a child, they will need proof of wages, such as a W-2 for part-time work. Except as stated below for spouses, taxable compensation is a requirement for investing in a Roth IRA.

Contributions if your salary is too high. Roth IRAs have income thresholds, so your contribution limit is based on your salary. You may run into tax issues if you are above the limit but continue to fund the account. If you file your federal taxes as single and earn less than $138,000, you can contribute the full amount. If you earn at least $138,000 and less than $153,000, your contribution limit will be reduced. You cannot contribute to the Roth if you earn $153,000 or more. The contribution reductions for married couples filing jointly begin at $218,000 and phase out entirely at $228,000. The IRS typically charges a 6% tax on Roth IRA contributions above the limits, so be mindful of these guidelines.

Don’t overlook spouse eligibility. There’s no such thing as a joint Roth IRA, but there is a spousal Roth IRA. If a couple files a joint tax return and one spouse is not a wage earner, they may open a Roth IRA for a nonworking spouse. This allows the working spouse to contribute to his/her own Roth IRA and the Roth IRA of their non-working spouse. This gives the spouse who isn’t working an opportunity to also save for retirement.

Beneficiary designations.  With either a traditional or a Roth IRA, you will want to be sure that your beneficiary designations are set up properly in accordance with your estate plan.  At Curran Estate & Elder Law in Reading, Berks County, Pennsylvania, our elder law attorney and estate planning attorney can guide you through the process to ensure your wishes are met.

Reference: U.S. News & World Report (April 129, 2023) “7 Mistakes to Avoid With a Roth IRA”