Can Roth IRAs Be an Option for Teenagers?

Estimated reading time: 3 minutes

When people imagine saving for retirement, generally the idea that people have is that you can’t start saving until you’ve landed a steady full-time job that has a retirement plan tied to it. In reality though, the earlier you can start saving the better off you’re going to be. You’ll save more money for retirement, and you’ll learn a lot of different life skills that can be used within other aspects of your life.

When investing in an IRA, it is important to build up good saving habits so you can make the maximum contribution each year. By learning how to save like this at a younger age, teens are more likely to implement smarter saving habits in their own lives. This is a great way to learn responsible spending rather the impulsive spending. Another good lesson that Roth IRAs can teach is about basic compounded interest. This is an incredibly common interest that banks and other financial institutions use. It is what’s used in other savings accounts and loans as well.

If you know how IRAs work earlier on, it is a lot easier to catch mistakes further down the road. Managing an IRA can teach teenagers how to keep track of their money and how it is changing over time. By learning to take care of your retirement funds, teenagers can also start good habits for their accounts if they decide to get a credit or debit card down the road. They can also learn how to prepare other savings for college or paying off college before they actually get to college. This is smart if they are trying to pay of student loans right after college.

Along with those life lessons, there is a huge increase in the amount of money you’ll have at retirement. If a teen were to start investing the maximum contribution in a Roth IRA at the age of 19, they could potentially be increasing their retirement fund by more than a third of a million dollars. And there isn’t anything stopping you from investing even earlier to get a bigger head start. It’s especially good if they learn other ways to invest their money at a young age so when the opportunity becomes available, they can have other opportunities available to them.

Starting a Roth IRA may seem intimidating at first. However, there are so many ways to learn how to navigate through the accounts, and there are people that want to help you invest your money in the most positive way possible. Even if you’re starting off small, the funds you earn from a part time summer job could be what eventually sets you up to live comfortably at your retirement. It is important to remember that the money you’re contributing towards your retirement should stay there until after you’re 59 ½ years old. Early withdraws have a penalty and you’ll be losing money, so it’s better to have a separate emergency fund to not have to worry about that penalty.

Consider a Roth Conversion if You Are Worried about Retirement Taxes

Estimated reading time: 3 minutes

When you are investing in your retirement, it is important to put it somewhere that will help you save money in the long run. Many people are currently investing in Traditional IRAs where they invest their tax deferred money now and then pay taxes on the withdrawals when the time to retire comes. Another option that may be beneficial to consider, however, is the Roth IRA. Both options offer different benefits, but depending on a few personal factors, one may prove more beneficial to you than the other.

While Traditional IRAs relieve some financial burden more immediately by allowing tax-deferred contributions, taxes will still be collected upon distribution. For some people, this may not be the ideal situation as it’s harder to predict where you’ll stand financially when the time to retire does come. Not only that, traditional IRAs have a required minimum distribution once a certain age is reached. On the opposite end of things, Roth IRAs take taxes out when the contributions are made, and then they are distributed tax free. Roth IRAs also do not have a required minimum distribution age, which is a good way to generate familial wealth.

If you are looking to open a Roth IRA but you are already investing in a Traditional IRA, you can execute a Roth conversion without having to start a new account and start over. This way you can take advantage of the tax advantages a Roth IRA has. The rules and regulations behind conversions are still fairly open, so there are a lot of different ways to achieve whatever it is you’re looking to do. If you are considering a Roth conversion, it is important to make sure that you evaluate all the different factors that go into it so that you can confirm that making the conversion is what is best for you. Some of those factors might be the taxes, or other costs, and the duration of time that you’ll be investing your money.

There are three different ways to make the conversion to a Roth IRA. The first way is to complete a 60-day rollover. This is where you take out an amount from your Traditional IRA and move it directly to the Roth IRA by writing a check made payable to yourself. This must be done within 60 days, however, otherwise you’ll be penalized and the conversion will not be successful. (Click here to learn more about 401K to IRA rollovers.)

Another way is a trustee-to-trustee transfer. All you have to do with this is tell your Traditional IRA trustee to direct the money from your investment to your Roth IRA trustee and they should take care of the rest. The final way is a same trustee transfer. This is virtually the easiest way to make the conversion as the money stays within the same institution your trustee just moves it from one account to the other. If you decide to do a Roth conversion and you take the steps to accomplish it, all you have to do is sit back and enjoy the benefits of the change.

Roth Conversions — Who, Why, and How

Estimated reading time: 3 minutes

There are many opportunities to help you maximize your retirement investment earnings. One technique many can take advantage of is converting assets from a traditional IRA to a Roth IRA. With a traditional IRA, your yearly contributions are tax deductible now, but you will have to pay income tax on all distributions later on. You will also be required to take a yearly distribution once you reach age 72. With a Roth IRA, you have to pay income tax on your contributions now, but aren’t subject to a tax on withdrawals once you reach age 59 ½. While you aren’t required to take a yearly distribution for a Roth IRA, you still have to leave your funds in your account for at least five years before taking any distributions to avoid penalty, even if you’ve reached the 59 ½ mark. Depending on your income level now and what you expect your income level at retirement to be, a Roth conversion could make sense for you. Below are guidelines to help you decide if you should convert your traditional IRA funds to a Roth IRA.

Who qualifies?

The IRS recently lifted the income cap on Roth conversions, so even high income earners can convert their assets into a Roth. However, just because you can convert doesn’t mean you should. Because you will be taxed on any converted funds coming out of your traditional IRA and won’t be taxed later on distributions from a Roth, it generally makes more sense to convert if you are in a lower tax bracket now than what you expect to be at retirement. If you are in your peak earning years, the taxes you pay on your conversion will be higher than the taxes you would owe at retirement when you start your traditional IRA distributions. If you think you’ll be in the same tax bracket at retirement as you are now but think congress will raise the income tax by the time you reach retirement, it also may make sense to convert to a Roth now.

Why convert?

As explained above, one reason to convert is to save on taxes. Another reason why someone would want to convert is if they were planning on entrusting the IRA to children or grandchildren upon death. This way, the inheritors wouldn’t owe taxes on the funds and could withdraw any time as long as the account met the five year requirement.

Six things to keep in mind

  1. The deadline for converting your traditional IRA to a Roth IRA is December 31st. Don’t confuse this with the deadline to contribute to a Roth IRA, April 15th.
  2. If you need to take a minimum required distribution the year you convert, you must take the distribution before you move any funds.
  3. If you are younger than 59 ½ and use IRA funds to pay for the conversion tax, you will be subject to a 10% fee. It is suggested that you use another source to pay for the tax to avoid unnecessary penalty.
  4. Even though you may qualify for a Roth conversion, there are still income restrictions on direct contributions to the account.
  5. There are no restrictions on how much you can convert or how many times you can convert. If you are going to be in a lower tax bracket for a few years, you can make a conversion each year that doesn’t bump you up to the next tax bracket and save even more on taxes with this method.
  6. Any post-tax funds in your IRA aren’t eligible for conversion.

Converting IRA funds to a Roth IRA may be beneficial to you in the long run, but it is recommended that you talk with your financial advisor about your individual situation before making any final decisions.

Should You Use Your Self-Directed IRA to Buy Investment Properties While Interest Rates are Low?

Estimated reading time: 2 minutes

The ability to invest in real estate is one of the most common reasons why retirement savers first start becoming interested in the self-directed IRA. An individual retirement account with a self-directed IRA custodian such as Quest Trust Company individuals to out their retirement funds to work in investments that traditional IRA custodians simply wouldn’t allow.

Adding to the desirability of investment real estate for retirement savers is that interest rates on mortgages and other types of borrowing continue to be quite low.

UBTI

Even if interest rates are low, you may not be able to derive the benefit you hope from borrowing money to buy real estate with your self directed IRA. This is because the tax laws that authorize individual retirement accounts put some limitations on how those accounts may be used. In particular, the activities of IRAs must be related to the fundamental purpose of the account, and that means to make investments. Borrowing money to make investments, however, is called out as an activity that’s at odds with the fundamental investment purpose.

As a result, when an IRA borrows money, the investment gains that result from that borrowing are considered to be unrelated business taxable income (or “UBTI”), which means that you’ll face a current year tax bill because of your investment borrowing. In many cases, this can greatly reduce or even exceed the advantages you gain by taking out a mortgage.

Investment Quality

If you choose to borrow money within your self-directed IRA in order to invest in real estate, be sure you are doing so because you are presented with a quality investment opportunity, rather than simply because interest rates are low. You should have a plan for how each piece of property you acquire is going to become a productive part of your portfolio, and your anticipated timeframe for that to occur.

Note that this doesn’t necessarily mean every piece of investment property you acquire needs to be productive right away. “Fixer uppers” are certainly appropriate for investment; just be sure you take into account any repair or remodeling costs into your financial analysis.

Fees

Regardless of how you choose to use your self-directed IRA to acquire investment properties, you should have a comprehensive understanding of the costs and fees that come with holding the property. For example, many real estate investors will tell you that as they build larger portfolios of property, they find that their costs on a per property basis tend to decline. This is because they are able to leverage certain economies of scale when it comes to property managers, repair and maintenance professionals, and other types of support they need in maintaining those properties.

Low interest rates can be a factor in deciding whether or not to buy investment real estate with your self-directed IRA, but it should not be the only factor.