Learn how higher income earners can contribute to a Roth IRA
ROTH IRAS ARE A POWERFUL WAY TO SAVE FOR RETIREMENT
Contributions into a Roth IRA are not tax deductible. However, the earnings in the account accumulate tax deferred, and can be distributed completely tax free after age 59½, provided 5 years have elapsed since the tax year of your first Roth contribution. Many investors who might otherwise contribute to a Roth IRA find themselves constrained by the IRS income limits which restrict their ability to contribute to a Roth IRA based on their adjusted gross income (AGI).
Retirement Planning is by far one of the most important areas of financial planning and one that we allocate a good portion of our time and resources to address. We break retirement planning up into two distinct phases:
- Accumulation Phase
- Distribution Phase
The accumulation phase is simply the phase in which you are still working and gathering assets to fund the second phase, which is the distribution phase. Clients in the distribution phase are typically either retired or semi-retired and are supplementing their pre-retirement income with distributions from their portfolios. In the last newsletter we addressed the accumulation phase. This article is part two of our two-part series on retirement planning and will address the distribution phase.
As published in the Holiday 2015 Edition of NJ Lifestyle
More often than not, when we ask a potential client what they are currently paying in investment fees, we receive one of two answers:
- I don’t know.
- I don’t pay anything.
The first answer is understandable, as the transparency of investment fees leaves a lot to be desired, and the second answer is just wrong. Fees come in various forms; including commissions, portfolio management, operating expenses, and 12-b1 fees. Although you may not see the fee, it does not mean you are not paying it.
Taxation of Investment Income
Not all investment income is taxed the same. Thanks to Congress, the federal tax code regarding your investments is constantly changing, and keeping up with these changes is important to optimize the tax efficiency of your portfolio. Remember, it’s not what you make but what you keep that counts.
The main determinants of federal investment income tax rates are your annual income and the type of investment income earned: interest income, dividend, and capital gains. Investments such as savings accounts, certificates of deposit, money markets, annuities, and taxable bonds (as opposed to municipal bonds) produce taxable interest income. This income is considered ordinary income and is taxed at an individual’s ordinary income tax rate, which ranges from 0% to 39.6%.