David Salazar May 16th 2019 Wealth MODs 101

• Wealth MODs 101
• Roth IRA MOD 2019

There are many investment and savings vehicles out there that are designed to help you prepare for one of the most challenging financial goals you can have - retirement. You can save all your money into a checking account, savings account, a Certificate Deposits (CDs) or even putting all your hard earned cash under a mattress but that is not recommended. However, there is an investment vehicle that has extraordinary tax benefits:

Roth IRA

The Individual Retirement Account or IRA is like a cousin to the 401(k). It's a portable retirement account that is not associated with an individual's employer. However, unlike a 401(k) and a Traditional IRA, the contributions to a Roth IRA are not taxed deductible. Then what is so good about them?

Here are the essential features of a Roth IRA:

• The only person that can contribute and own an IRA is yourself. Both you and your spouse may each have one but not share it.
• Anyone with Earned Income is eligible to contribute to a Roth IRA depending on how much you make.
• For 2019, you can contribute a max of $6,000. If you are older than 50, you can contribute up to $7,000.
• Contributions are not tax-deductible; in laymen terms, you can't "write-off" these contributions as expenses.
• Gains grow tax-free.
• You can withdraw your contributions at any time.
• Early Withdrawals on gains are subject to a tax penalty unless you meet certain conditions.
• There are no Required Minimum Distributions (RMDs).

Roth IRAs are a great investment vehicle when it comes to saving for retirement, especially if you believe you will be at a higher tax bracket in the future. One of the reasons many individuals don't want to start contributing to a retirement account is because they believe that once they contribute, they aren't allowed to touch it until they are "old." It's not true. Now you may get taxed if you don't meet certain conditions, but when it comes to a Roth IRA, you can take out your contributions whenever you want, and there is no age limit on when you are not allowed to contribute, unlike the Traditional IRA. However, certain conditions must be met in order to be able to withdraw your earnings tax-free, and there are Contribution Limitations based on your income.

Roth IRA Contribution Income Limits for 2019

If there are any caveats to the Roth IRA, this is the only one, I believe, that will make you have to choose a different savings vehicle.

Things To Consider

• Withdrawal Penalties on Gains – You can withdraw the gains from your account, without incurring a tax penalty if you opened the account, made your first contribution at least five years ago, and meet at least one of the following conditions:
• Your age is at least 59 ½.
• You are disabled
• First home purchase (up to $10,000 max)

Conclusion

Clearly, the Roth IRA account has far more upsides than downsides. Nevertheless, as stated in MOD 9, you must always do your due diligence when anyone recommends a particular investment vehicle or product over another. That being said, we have compiled the pros and cons of having a Roth IRA account to summarize:

Now to address the elephant in the room, in case you haven't noticed it. You have to select the investments that go into the account. People always tend to forget or don't realize that IRAs are just buckets that hold investments (Stocks, Bonds, ETFs, Mutual Funds, CDs, etc.), not an investment itself. I have met people that thought if they open up an IRA and start contributing, you will start seeing a 6% - 8% annual return. I don't blame them because most of what they read or see, don't explain how they obtain that annual return. So, they believe IRAs are investments within itself.

There is a multitude of factors that go into the decision-making process of choosing the right investment that is good for you:

• Obtaining and understanding your capacity to take risk and your emotional tolerance to risk. Also known as your risk profile.
• Diversifying between the right mix of investments (Stocks, Bonds, ETFs, Mutual Funds, CDs, etc.). Also known as asset allocation.
• Having a real financial plan. Whether it's figuring out when to rebalance, how often to contribute, assigning beneficiaries, when to make asset allocation changes or having a contingency plan.

Choosing the right investments takes a substantial amount of planning. If you don't have time or you are unsure about how to even begin, get in touch with your Financial Advisor to help you out with your current situation or feel free to reach out for tailored advice.

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