Quest Trust Company›Blog›Roth IRAs and Roth Conversions

Category: Roth IRAs and Roth Conversions

Why You Should Consider Starting a Roth IRA

Posted on by Quest Trust Company
Estimated reading time: 3 minutes

Retirement. Maybe it’s a long way off, or maybe you’re starting to see the light at the end of the tunnel. 

Regardless, it’s never too late to start thinking about how you’ll finance your golden years. And a Roth IRA is a great retirement account that offers some unique advantages over its competition.

Let’s start with the basics right now.

What is a Traditional IRA?

A traditional IRA is an individual retirement account that lets you make contributions that can be fully or partially deductible towards your taxes. Further, the earnings and gains are not taxed until you make a withdrawal.

Simply put, you contribute money every year, earn interest, and don’t pay taxes on the income until you withdraw later. However, there is a withdrawal penalty of 10% for withdrawing funds before age 59 1/2. 

How Does That Differ from a Roth IRA?

A Roth individual retirement account is the younger sibling of the traditional IRA. They are similar in that they offer tax-free growth for investments within them. 

The key difference between a traditional IRA and a Roth IRA is when you get to claim your tax break. A traditional IRA, you pay taxes when you withdraw from it, while a Roth IRA has you pay taxes upfront.

Roth IRAs do not have age restrictions but do have annual income-eligibility restrictions. Further, you can draw from your Roth IRA contributions at any time without penalty. You will pay a withdrawal penalty if you pull from your earnings before 59 1/2, similar to traditional IRAs.

Both types of IRAs can have funds drawn from for first-time home buyers.

Why Choose a Roth IRA Over a Traditional IRA?

A traditional IRA can have advantages: by deducting your IRA contributions upfront, you effectively lower your adjusted gross income (AGI) for the year. This can potentially help you qualify for tax incentives, such as student loan interest deductions.

A Roth IRA has you pay the bill upfront. Your contributions are still taxed as income and don’t lower your AGI. However, any withdrawals you make in retirement are generally tax-free.

If you’re maximizing your yearly contribution for a Roth IRA, the compounded interest, year-over-year, can heavily outweigh the initial upfront costs.

Generally speaking, if you think you’ll be in a higher tax bracket when you retire– especially true for those just entering the workforce– a Roth IRA is the better choice.  

Paying the taxes today, while you’re in a lower bracket, will allow you to reap the tax-free rewards later, instead of paying for them in your higher tax bracket.

What if I Already Have a Retirement Account Through Work?

Whether it’s a 401k or different type of retirement plan, you’re still eligible to start a Roth IRA and can make up to the appropriate contribution depending on your income level and filing status.

The compounded interest earned in a Roth IRA can be especially advantageous if you’re just entering the workforce. Likely your income level is below the threshold, and you’ll maximize interest returns year over year.

How Do I Sign Up?

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Both a Roth and traditional IRA are great for retirement. Because of their accessibility, virtually everyone should take advantage of the tax benefits they provide.

Know Your Value: A Guide to Fair Market Values

Posted on by Quest Trust Company
Estimated reading time: 2 minutes

You want to get the most out of your investment. After all, the point of any investment is to make money, so the last thing you want is to be getting less than you deserve.

The problem is that you don’t really know the fair market value. You don’t want anyone ripping you off after all of your hard work, so what do you do to make sure this never happens?

This article will show you exactly what you need to know about fair market values. Read on to find out more.

What Is Fair Market Value, Exactly?

The first thing you need to learn is what fair market value actually is. To put it simply, the fair market value is the price that an asset (such as your investment) would sell for on the open market. It’s the typical value under normal circumstances.

There’s a bit more to this, of course. For starters, it has to be a clean trade. Specifically, both the buyer and seller have to be reasonably knowledgeable about the asset, they have to be free of any pressure to trade, and they need enough time to complete the transaction.

Because of this, the fair market value should represent an accurate valuation of the product in question.

How to Calculate the Fair Market Value

Although there are nuances to calculating the value of your asset, for the most part, it’s actually pretty simple to add things up.

In the case of your investment, you’re going to take the price of your asset during the time of your original purchase and subtract values due to factors such as general wear and tear, depreciation, or any sudden damages that may have lowered the value.

In some lucky cases, you may be adding more to the original price. In that case, you would add any increase that accumulated to the price you originally paid for the asset, and get a new value for your investment.

This is an extremely simple way to calculate your investment’s value and get the most out of your product that you deserve.

The Company You Can Trust

Now you know about the fair market value and how it applies to your investment. However, the investment world can be a tricky one, and you’ll want all the help you can get to navigate it carefully and successfully. We’re the right team to have on your side.

At Quest Trust Company, we offer investment aid in fair market values, general investments, and even real estate. We also work with all types of IRAs, including traditional, Roth, SEP, and Simple IRA.

Ready to get started? So are we. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

We look forward to helping your investment reach its fullest potential!

Three Ways a Roth IRA Could Be for More than Retirement

Posted on by Juan Deshon

Estimated reading time: 3 minutesWhen people think about IRAs, they typically associate them with retirement. After all, that is what they were designed for. However, some investors don’t realize that funds from a Roth IRA can be used for other expenses that may arise before retirement. Below we will explain the three main categories people use their Roth IRA funds for besides retirement.

College Expenses

Student debt is now the second leading consumer debt category in the country, right after mortgage debt. The bill on student debt is even higher than for credit card or car loan debt! With the high interest rates student debt attracts, it can sometimes feel as if student loans will never be payed off.

Luckily, funds from a Roth IRA can be used to pay for school expenses, and some parents use their IRAs as a backup college fund for their child. If the child doesn’t attend college, or they have other means of paying for school, then the parents still have that money for their retirement. Although savers can pull contributions out penalty-free after the account has been open for 5 years, higher education expenses still count as a qualified distribution, so account owners don’t have to worry about paying a penalty if they don’t meet the distribution requirements. Funds can be used for the plan owner, their spouse, their children, or their grandchildren.

First-Time Home Purchase

Another exception for the early distribution rule is for first-time home purchases, builds, or rebuilds. If both spouses own an IRA and are both first-time home buyers, they could each pull $10,000 from their accounts for a total of $20,000 for their new home. The term “first-time home buyer” is slightly misleading, though. As long as one or both spouses have not owned a home for two years prior to the home purchase, they count as first-time home buyers. However, there is a $10,000 lifetime limit to this loophole for each individual, so buyers can’t take advantage of their retirement accounts forever.

Emergency Fund

Instead of contributing to a traditional savings fund, where the interest gained is pennies for every thousand dollars, some people use their Roth IRA as a place to hold and quickly grow an emergency fund. Roth IRAs typically have better returns than savings accounts, but it may take longer to receive the actual funds if an emergency arises. In this case, it’s wise to have 3-6 months’ worth of accessible funds available for short-notice emergencies and save the rest into a Roth. This way, you can still benefit from higher gains and have a bigger retirement account if you don’t end up using the funds in the Roth for an emergency.

While most financial advisors would recommend not touching retirement money until retirement, there are special circumstances that may cause one to consider using Roth funds for other purposes. Always consult a financial expert before moving money around or pulling from your Roth IRA to avoid any unnecessary penalties.

What is the Age Requirement to Contribute to a Roth IRA?

Posted on by Juan Deshon

Estimated reading time: 3 minutesWith all of the different age limits and contribution limits on the various retirement accounts, it can be confusing keeping track of everything. Roth IRAs are a bit different than Traditional IRAs, including the contribution age limits. Read on to discover when and how much you can contribute to a Roth IRA.

Minimum Age Limit

Surprisingly, there is not a minimum age limit to Roth IRA contributions. The caveat, however, is that the owner of the account must earn taxable income in order to contribute to one. So, no, you can’t start one for your newborn grandchild. Once they start earning income, however, they can open and contribute to one. Unfortunately, their allowance for household chores doesn’t count as income in this sense. Typically, they will need to prove they were on payroll somewhere in order to count it as taxable income. If you owned a business and included them on your payroll for work they performed for the business, then this is usually deemed acceptable. Always double check with your local financial advisor first before employing this strategy.

Starting a Roth IRA for a teen’s first job is one of the wisest choices they can make with those dollars. Not only will their retirement money grow tax-free, but it can also grow to a couple hundred thousand dollars by the time they reach retirement age. Not to mention, they have the most expendable income at this age due to their lack of bills and other responsibilities. One of the “downsides” to this, however, is that they will have unlimited access to these funds once they reach age 18. If you want more control over when they can access their funds, a trust fund or naming them as a beneficiary on your own retirement account may be better options.

Remember, though, they can only contribute the maximum amount every year ($6,000 for 2021), or up to the amount they earned if it was less than $6,000. So, if they made $3,000 from their part-time fast-food job this year, they can only contribute up to $3,000 into their Roth IRA.

Maximum Age Limit

Unlike Traditional IRAs, there is actually no maximum age limits for contributions to a Roth IRA. As long as you are earning taxable income, you can contribute to your Roth—even if you’re 95! Contribution limits still apply. If you don’t have an income, but your spouse does, they can make contributions with their income into a Spousal IRA for you.

Also, you can make perform a rollover to a Roth IRA at any age, regardless of income. If you want to roll over funds from a Traditional IRA once you reach the minimum age for required minimum distributions on that account, you can. Just be aware that you may need to pay taxes on the funds rolled from a Traditional to Roth IRA, so always consult your financial advisor before making any moves. Due to restricted recharacterization laws, owners are no longer permitted to recharacterize a Roth rollover. Once you roll over, there’s no going back. Just another reason to consult your advisor before moving funds!

What Is the Maximum IRA Contribution for 2021?

Posted on by Juan Deshon

Estimated reading time: 2 minutesAlthough the IRS has decided to keep contribution limits the same for retirement accounts this year as it was last year, they did raise eligible income levels for Roth IRAs to adjust for inflation and may even help more savers utilize Roth accounts. Here is a quick refresher on contribution limits and income restrictions:

IRA Contribution Limits

For both Traditional and Roth IRAs, savers may contribute up to $6,000, or $7,000 for people 50-years-old or older. Keep in mind, this is the total amount per person. If you have multiple IRAs, you are only allowed to contribute the $6,000 ($7,000) total between all of your accounts. The only exception to this is if you have a Spousal IRA, which allows the primary income-earner to contribute another $6,000 to an IRA of their non-working spouse. With the new age of cryptocurrency, you also need to freshen yourself up on the invest opportunities such as Bitcoin in Roth IRA.

Another caveat to retirement accounts is that you may only contribute the maximum amount as long as your income is at or above $6,000 per year. Otherwise, you can only contribute up to what your annual income is. For example, if you make $3,500 this year, you can only contribute $3,500 to a retirement account. Income counts as anything earned from salary, hourly pay, or profits from a small business. Passive income, such as earnings on an investment, do not count as eligible income.

Income Restrictions for Roth IRA Contributions

Since Roth IRAs allow you to pull out money tax-free, the government has issued income restrictions for who is allowed to contribute to these accounts. Here is a breakdown of these limits:

Single taxpayers with a MAGI of $125,000 can make a full contribution, and those with a MAGI between $125,000 and $140,000 can make a lesser contribution.

Married taxpayers can make full contributions where their MAGI is $181,000 (and lesser contributions for a MAGI between $198,000 and $208,000).

 

How Much Can You Contribute to A Roth IRA?

Posted on by Juan Deshon

Estimated reading time: 2 minutesEvery once and awhile the IRS increases contribution limits or income limits for Roth IRAs. This year, while contribution limits are staying the same, income limits have increased for who is eligible to contribute to a Roth IRA. For 2021, eligible participants may contribute up to $6,000 toward their Roth IRA. If you are older than 50 you can contribute up to $7,000. Contributions can be made anytime until the tax filing deadline.

Earned Income Nuances

Earned income is defined as anything you made from salary, hourly pay, or profits from a small business. Basically, if it’s taxable it counts as earned income. If your earned income happens to be less than $6,000, you may only contribute up to the full amount of your earned income, not the full $6,000. Even if you make no money but your spouse does, you can set up a Spousal IRA and contribute the full $6,000 to both accounts as long as your spouse earns more than $12,000 in a year.

Contribution Strategies

There are a couple of different options when it comes to making contributions. You can contribute the full amount in one payment at any time during the eligible window. Another strategy is what’s called dollar-cost-averaging. This is where you spread your contributions out over the course of the year, whether that’s monthly or quarterly, to average your risks and rewards. By spreading out the contributions you may buy shares when they are priced low or high, but it will average your cost in the end. Since it’s difficult to know when prices will be low, if you contribute all at once, you may be unwittingly buying shares at their highest price point. Dollar-cost-averaging minimizes that risk.

Conversions

When converting funds to a Roth IRA, there are no contribution or income limits. Therefore, if you already opened a Roth account while you were eligible, you can roll over funds from another account into your Roth, no matter the amount. If you are no longer eligible for contributing directly to a Roth, you can use the “backdoor Roth” strategy to benefit from tax-free distributions at retirement. Keep in mind, however, that you will need to pay taxes on any untaxed funds converted and the funds may count as earned income that could bump you to a higher tax bracket. Always consult your financial advisor before converting funds from one account to another.

When Can You Withdraw from A Roth IRA?

Posted on by Juan Deshon

Estimated reading time: 3 minutesAlthough it’s best to wait until retirement to use your retirement funds, so you fully benefit from the compounded interest made on your funds, there are times when you may need to make a withdrawal to cover an unexpected expense. Roth IRAs are different from Traditional IRAs when it comes to withdrawal rules, so you will want to understand to rules and regulations related to Roth IRAs before taking out funds. Taking too much, for instance, could result in additional taxes and penalties. Here is a basic outline explaining when you can withdraw, and how much, from a Roth IRA.

Before age 59 ½

If you are younger than the age of retirement, you can still take withdrawals, but you will be limited on how much you can take. Roth IRA owners are allowed to make withdrawals on their contributed funds tax-free and penalty-free at any time. However, withdrawals on earnings will be subject to both taxes and penalties. For instance, if you have only had your account for one year, you made $5,000 in contributions, and it appreciated to $5,200, you could only withdraw the $5,000 without taxes or penalties.

If you are planning on withdrawing more than just your combined contributions, there are a few points to keep in mind. First, the five-year rule may save you from having to pay penalties or taxes. If you have had your Roth IRA account for more than five years, you won’t have to pay a penalty on your earnings withdrawal. Below age 59 ½, you will still be subject to paying taxes on your earnings withdrawal unless you meet any of the following criteria:

    • You use the funds for a first-time home purchase—up to $10,000 lifetime maximum
    • You pass away or become disabled
    • You use the funds to pay for unreimbursed medial expenses exceeding 10% of your AGI (7.5% for 2017-2018)
    • You use the funds to pay for medical insurance after losing your job
    • You use the funds to pay for higher education tuition for you, your children, or your grandchildren
    • You use the funds as a qualified disaster recovery assistance
  • The withdrawal is part of a substantially equal periodic payment plan—lasting for at least five years.

If you have had your account for fewer than five years, then you will still be subject to taxes, but not penalties on your earnings if you meet the above requirements.

Ages 59 ½ to 70

Again, Roth IRA plan holders can take distributions on their contributions at any time. However, within this window of time, you may be subject to taxes but not penalties on earnings if you have had your account for fewer than five years. After age 59 ½, if you have had your account for more than five years, you can take withdrawals on earnings without any taxes or penalties.

Age 70 ½ and older

If you have had your account for fewer than five years, withdrawals on earnings will be subject to taxes but not penalties. If you have had your account for more than five years, then you can withdraw earnings without paying any taxes or penalties.