More often than not, the milestones we look back on in the financial services industry are negative in nature: Black Monday in 1987, the dot com bubble burst around 2000, the collapse of Lehman Brothers in 2008, The Great Recession of 2007 – 2009, the Flash Crash of 2010. Even as we remember how these events made life incredibly difficult for a lot of folks in the moment, the economic lessons we learn tend to trend positive: time and time again, our resilient economy continues its long-term upward trajectory.
But the milestone we’re going to discuss today is unique because there aren’t many negative things to say about the Roth IRA, which this year turns 20. After two decades, the Roth IRA is still one of the best investment and retirement vehicles available to most folks of any age. That’s because it has some features that set it apart from traditional IRAs and other investment products.
Listen to the Episode
Simply "click" or "tap" on the "play" icon in the image below to listen to the episode. If you'd like to subscribe to the podcast using an Apple product (iPhone, iPad, iPod touch) click here to learn how. If you use an Android phone, we recommend using the Podcast Addict App, which can be downloaded here.
Key Insights on the Roth IRA at 20
In celebration of the Roth IRA’s big birthday, let’s take a look at what makes it so special and what you may be missing if you don’t have one.
1. It helps you to take control of your retirement planning.
One of the reasons that our government created the Roth IRA was to give folks a retirement vehicle that wasn’t dependent on employer benefits. This idea has proved prescient. Pension plans continue to shrink. Many underemployed millennials, small business owners, and “gig economy” workers don’t have the luxury of an employer-match 401(k) plan.
But even folks who do receive solid benefits from their employer should consider opening a Roth IRA, because …
2. It builds your wealth tax-free.
2018 also marks the 40th birthday of the traditional IRA, which remains a very popular and important retirement product in its own right.
But one big thing that sets the Roth IRA apart from traditional IRAs is that after paying taxes on your contributions, the money inside your Roth IRA grows tax free. You can contribute up to $5,500 per year if you’re under 50 years old, or $6,500 once you hit 50, and the compounding of that contribution can grow into a sizable nest egg.
3. You can keep making contributions as long as you have earned income.
At age 70 ½, traditional IRA holders have to stop making contributions and start taking required minimum distributions as determined by IRS guidelines.
A Roth IRA doesn’t have those restrictions. As long as you are earning income you can keep contributing to your Roth, and you can leave your money in that account as long as you want.
However, if your income exceeds $120,000 for an individual or $189,000 for a married couple filing jointly, the government does scale back the amount you’re allowed to contribute per annum.
4. It’s a great option for new investors – like your kids and grandkids.
I encourage all of my clients with families to talk to their working children about the power of a Roth IRA!
It can be so difficult for young people to think about what their lives and finances are going to be like 40 or 50 years down the road. But the earlier that young adults get in the habit of saving and investing, the bigger that nest egg is going to grow. Putting off a financial plan for even five years can cost your children dearly in the long run.
Many young workers think they can’t afford to invest. Others who grew up during the 2008-09 economic collapse have a negative view of investing altogether. Explain to your kids that volatility is just the tax they’ll pay on the wealth they’ll be building. Even if your child can’t afford the max $5,500 contribution, just contributing a couple hundred dollars out of that monthly paycheck is going to add up in the long run.
5. You can convert a traditional IRA or 401(k) into a Roth IRA.
But should you?
That’s one issue we deal with often at Keen Wealth. Making automatic contributions to a Roth IRA and letting the market do the work is pretty simple. But moving one of your existing retirement assets into a new Roth IRA triggers taxes on the money you’re converting. Deciding how and when to start taking distributions from your Roth IRA once you do retire – or in certain circumstances even earlier – is another complicated issue that can affect the whole of your retirement planning. My advice, as always: talk to a pro.
6. It’s not going anywhere. Probably.
After President Trump’s election, there was a great deal of rumbling in Washington about changing or even eliminating the Roth IRA to increase tax revenue. Those rumblings have died down a bit, but it’s impossible to predict what future government leaders might do.
One thing in the Roth IRA’s favor is its tremendous popularity as employer benefits continue to slim down. In the US today, about one-third of IRA investors have Roth IRAs. If a government messed around with IRAs too much it might generate a bit more tax revenue … but it would definitely create a huge group of very unhappy voters.
For all these reasons, we remain bullish on the Roth IRA at Keen Wealth. Even if the Roth doesn’t make it to 40 in its current form, investors who take advantage of its benefits right now can go a long way towards securing their retirements and setting a valuable example for their heirs to follow. Bill Keen on the Roth IRA...
“Investors who take advantage of the Roth IRA right now can go a long way towards securing their retirements."
Please share this page and the podcast with your friends and colleagues via Linkedin, Twitter and Facebook. You can use the share buttons. Thanks!
Got a question or comment? Email it to me and we'll get back to you or call our office at (913) 624-1841.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.
The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
The Amazon Best Seller ranking listed on marketing materials is specifically referring to Best Seller rankings for the Kindle Top 100 Paid Lists under the subcategories of: Budgeting and Financial Risk Management, based on data as of September 5, 2019. Amazon rankings although relevant on how a product is selling overall doesn’t necessarily indicate how well an item is selling among other similar items or similar item categories. Amazon may choose the most popular categories or subcategories within which an item has a high ranking to determine its best seller rankings. These rankings are updated hourly and as a result, should be expected to fluctuate as such. Keen Wealth Advisors and Amazon are not affiliated entities. For further details on Amazon rankings please visit https://www.keenwealthadvisors.com/important-disclosures.