Archive for the ‘rollover’ Tag

Don’t Want to Lock up Cash in a Retirement Account? Consider Roth by April 17.

Originally published in the Pacific Grove Hometown Bulletin

April 3, 2012

A lot of people like the idea of contributing to a retirement plan, but do not like the idea of locking up the money until retirement without being penalized.  People are often concerned about supplementing income if they lose their job, or have an unexpected major expense, or even if they are saving for a big purchase such as a car or a home.  If you find yourself keeping money in a taxable investment account, savings, or checking account for these purposes, I strongly encourage you to start contributing it to a Roth IRA if you are eligible.

The beauty of a Roth IRA is that you can take out your direct contributions tax-free and penalty-free at any point.  For example, if you contribute $5,000 a year for three years, you can always take out up to that $15,000 at any point.  What you cannot take out are the earnings.  If it grows to $16,000 through interest, dividends, or appreciation, you cannot take out that last $1,000 without penalty and tax until you retire.  The big benefit is that your Roth IRA is an umbrella that protects the assets under it from being taxed if they generate income.  You will pay no tax on the $1,000 earnings in the Roth IRA – whereas, you would if it was held in a taxable account.  You can hold almost any investment in a Roth-IRA including cash, stocks, bonds, mutual funds, or even alternative investments such as rental property.  You can currently contribute up to $5,000 a year ($6,000 over age 50) and you have until April 17, 2012 to contribute for tax year 2011.  Don’t miss out!

Some advisors incorrectly cite a five-year rule that says you have to have the account open for five years before taking penalty-free withdrawals.  This applies in certain circumstances, but not to direct contributions.  What they are failing to understand are the ordering rules for distributions.  I will say again, you can always take out up to the sum-total of your direct contributions made to the account with no tax and no penalty.  Be aware that rollover conversions from other retirement plans and traditional IRAs are not considered direct contributions.  You should get competent tax advice if you are going to take out beyond your direct contribution total.

To be eligible to make a Roth IRA contribution, you must have at least as much earned compensation as you want to contribute.  If you file jointly, you can contribute for your spouse even if he/she does not work enough (or at all) assuming you earn enough compensation between the two of you.  Your ability to contribute starts phasing out as your income hits $107,000 if filing single, and $169,000 for married filing jointly.  These amounts are based on special modifications to your adjusted gross income, so you would want to verify with your tax professional if you are close to these thresholds.  You can also contribute to a Roth IRA even if you contribute to an employer-provided plan (some exceptions for married filing separate), however, your contributions to traditional IRAs and Roth IRAs are aggregated for contribution limit purposes.

One other advantage of the Roth is that you can continue to contribute during your entire life as long as you have earned compensation, and there are no required minimum distributions when you reach age 70 1/2 as there are for traditional IRAs.

What you might find by contributing, is that something else works out in your financial life whereby you do not end up needing that cash or part of it after all, and at that point, you will be very glad you contributed to the Roth during those years.  To set up a Roth IRA, talk to your financial advisor.  If you do not have an advisor, you can go online to a financial institution like Vanguard or Fidelity and set one up in 15 minutes.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.