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The Sooner the Better When It Comes to a Roth

A Roth IRA is an individual retirement account funded with after-tax money. For those who qualify, a Roth IRA can be an integral part of not only an individual’s retirement savings, but also can be used to fund financial goals throughout his or her lifetime.

Why Roth Now

Hedging Future Tax Rates
If tax rates increase or you fall in a higher tax bracket in the future, Roth IRA funds can still be distributed tax-free.

Need for Retirement Savings
Due to the uncertainty of Social Security and longer life expectancies, saving more for retirement in a variety of investment vehicles should be a priority.

Compounding Tax-Free Growth
Earnings (including dividends, interest, and capital gains) that accrue in a Roth IRA are tax-free year over year.

Benefits for Young Investors

Flexibility and Access to Assets
Roth IRA contributions may be withdrawn tax- and penalty-free at any age and for any reason. Earnings can also be withdrawn at any age; however, they will generally be subject to taxation and a 10% penalty unless both five years have elapsed from the time of the first Roth IRA funding and the IRA owner has reached age 59½. The 10% early withdrawal penalty on earnings is waived for distributions used to pay for qualified education expenses, health insurance, medical expenses, active military duty, or first-time home purchase.

Time Horizon
Young investors have time on their side. The longer assets remain in a Roth IRA, the longer time horizon there is to compound tax-free growth. Think of it this way; assets in the Roth IRA will have the opportunity to gain interest on interest for many years to come.

Roth IRA Versus Savings Account
Many parents think that their child should be saving earned income in a bank account, but saving that child’s paycheck in a Roth IRA instead may be more beneficial.


  ROTH IRA SAVINGS ACCOUNT
Eligibility
  • Must have earned income
  • If single filer: MAGI* below $144,000
  • If married filing jointly: MAGI* below $214,000
  • No eligibility requirements
Contribution Limit
  • The lesser of: earned income or $6,000 ($7,000 if age 50 or older)
  • No limit
Benefits
  • Tax-free growth
  • Broad investment options
  • Access to money
  • Interest
  • Minimal risk
  • Access to money
Drawbacks
  • No tax deduction
  • Earnings may be taxable and 10% penalty if withdrawn prior to age 59½
  • Minimal investment options
  • Limited earnings potential
* Modified Adjusted Gross Income


Note: The IRS allows for a parent or other family member to contribute to a Roth IRA on the IRA owner’s behalf; however, the IRA owner must have earned income to substantiate the contribution.

If you’re not funding a Roth IRA, you may be missing out on an exceptional opportunity. Contact a Stifel Financial Advisor today to find out how a Roth IRA may benefit you. It is always recommended that you seek the aid of a competent tax advisor or accountant to assist with tax advice and guidance.

State and local tax laws may differ from federal tax laws. Stifel does not provide tax advice. You should consult with your professional tax advisor regarding your particular situation.

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