RATIONAL INVESTING
IN AN
IRRATIONAL WORLD

More Info
THE STRONGEST PRINCIPAL
OF GROWTH
LIES WITHIN HUMAN CHOICE

More Info
RETIREMENT PLAN CONCERNS?
CALL A PAISLEY ADVISOR
AND SLEEP EASY TONIGHT

More Info
1
2
3


Active Strategic Management

  • Wealth Management / Financial Planning

    Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. Contact a Paisley Financial Associate to learn more about how we can provide for you. 

    Learn more
  • 401 K Plans

    A 401k retirement plan is a special account funded through pre-tax payroll deductions. Funds in the account can be invested in stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until withdrawn.

    Learn more
  • IRA Rollovers

    An IRA is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many varieties of IRA's please read more on the link below to see which is right for you.


    Learn more
  • Educational Plans

    A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. Many different plans exist. Learn more to see which is right for you.


    Learn more
  • Alternative Investments

    Alternative investments are instruments such as physical gold or other commodity based ETF's such as oil or lumber which can be used as a hedge or inflation hedge against an overall portfolio.

    Learn more
  • Independent Research

    Paisley Financial provides timely and accurate research on markets, companies and industries. Our team offers more than three decades of experience as well as time held relationships with industry experts that will bring the highest quality of knowledge to our customers.

    Learn more

ROTH IRA's

You know that preparing for retirement is important. There are a number of different retirement accounts available, and one of those is the Roth IRA. A Roth IRA is easy to open, and nearly anyone can do it. If you are considering retirement accounts, do your homework and decide which is most likely to work best for you. You can start with learning about the Roth IRA.

A Roth IRA (Individual Retirement Account) is a savings plan that allows you to make pre-taxed contributions to a retirement plan. The earnings are tax-free, although Roth IRA contributions are non-deductible. Come retirement, qualified withdrawals are also tax-free.

A Roth IRA account is typically the best choice if you plan on being wealthier when you retire than you are today, because the funds you contribute are taxed based on your current earnings.

There are distinct advantages of setting up a retirement plan and many differences between the plans that are available. Feel free to give us a call to discuss the ins and outs of the many plans. In the meantime you can review some of the advantage and disadvantages of a ROTH IRA below.

Advantages

• Direct contributions to a Roth IRA may be withdrawn tax free at any time. Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty free after the "seasoning" period (currently 5 years). Earnings may be withdrawn tax and penalty free after the seasoning period if the condition of age 59½ (or other qualifying condition) is also met. This differs from a traditional IRA where all withdrawals are taxed as Ordinary Income, and a penalty applies for withdrawals before age 59½. In contrast, capital gains on stocks or other securities held in a regular taxable account for at least a year would be taxed at the lower long-term capital gain rate, which is currently 15%. This potentially higher tax rate for withdrawals of capital gains from a traditional IRA is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA.

• If there is money in the Roth IRA due to conversion from a traditional IRA, the Roth IRA owner may withdraw up to the total of the converted amount without penalty, as long as the "seasoning" period (currently five years) has passed on the converted funds.

• Up to a lifetime maximum $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence for a first time buyer. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives such a distribution must not have owned a home in the previous 24 months.

• Contributions may be made to a Roth IRA even if the owner participates in a qualified retirement plan such as a 401(k). (Contributions may be made to a traditional IRA in this circumstance, but they may not be tax deductible.)

• If a Roth IRA owner dies, and his/her spouse becomes the sole beneficiary of that Roth IRA while also owning a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into a single account without penalty.

• If the Roth IRA owner expects that the tax rate applicable to withdrawals from a traditional IRA in retirement will be higher than the tax rate applicable to the funds earned to make the Roth IRA contributions before retirement, then there may be a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle while working. There is no current tax deduction, but money going into the Roth IRA is taxed at the taxpayer's current marginal tax rate, and will not be taxed at the expected higher future effective tax rate when it comes out of the Roth IRA.

• Assets in the Roth IRA can be passed on to heirs, unlike Social Security.

• The Roth IRA does not require distributions based on age. All other tax-deferred retirement plans, including the related Roth 401(k),require withdrawals to begin by April 1 of the calendar year after the owner reaches age 70½. If you don't need the money and want to leave it to your heirs, this is a great way to accumulate income tax free. Beneficiaries who inherited Roth IRAs are subject to the minimum distribution rules.

• Since a Roth contribution has already been taxed, it may be equivalent to a larger contribution to a traditional IRA that will be taxed upon withdrawal. For example, a contribution of the 2008 limit of $5,000 to a Roth IRA may be equivalent to a traditional IRA contribution of $6667 (assuming a 25% tax bracket at both contribution and withdrawal). In 2008 you cannot contribute $6667 to a traditional IRA due to the contribution limit, so the post-tax Roth contribution may be larger. However, many people end up in a lower tax bracket in retirement, or, the effective tax rate applicable to their traditional IRA withdrawals in retirement will be equal to or lower than their marginal tax rate while working, and they will not realize as much of this benefit. Regardless of whether marginal tax rates increase or decrease, Roth IRA earnings are not taxed, if you follow the rules.

• On estates large enough to be subject to estate taxes, a Roth IRA can reduce estate taxes since tax dollars have already been subtracted. A traditional IRA is valued at the pre-tax level for estate tax purposes.

Disadvantages

• Contributions to a Roth IRA are not tax deductible. By contrast, contributions to a traditional IRA are tax deductible (within income limits). Therefore, someone who contributes to a traditional IRA instead of a Roth IRA gets an immediate tax savings equal to the amount of the contribution multiplied by their marginal tax rate while someone who contributes to a Roth IRA does not realize this immediate tax reduction. Also, by contrast, contributions to most employer sponsored retirement plans (such as a 401(k), 403(b), SIMPLE IRA or SEP IRA) are tax deductible with no income limits because they reduce a taxpayer's adjusted gross income.

• Eligibility to contribute to a Roth IRA phases out at certain income limits. By contrast, contributions to most tax deductible employer sponsored retirement plans have no income limit.

• Contributions to a Roth IRA do not reduce a taxpayer's adjusted gross income (AGI). By contrast, contributions to a traditional IRA or most employer sponsored retirement plans reduce a taxpayer's AGI. One of the key benefits of reducing one's AGI (aside from the obvious benefit of reducing taxable income) is that a taxpayer who is close to the threshold income of qualifying for some tax credits or tax deductions may be able to reduce their AGI below the threshold at which he or she may become eligible to claim certain tax credits or tax deductions that may otherwise be phased out at the higher AGI had the taxpayer instead contributed to a Roth IRA. Likewise, the amount of those tax credits or tax deductions may be increased as the taxpayer slides down the phase out scale. Examples include the child tax credit, or the earned income credit, or the student loan interest deduction.

• A taxpayer who chooses to make a Roth IRA contribution (instead of a traditional IRA contribution or tax deductible retirement account contribution) while in a moderate or high tax bracket will likely pay more income taxes on the earnings used to make the Roth IRA contribution as compared to the income taxes that would have been due to be paid on the funds that would have been later withdrawn from the traditional IRA, had the taxpayer made a traditional IRA contribution. This is because contributions to traditional IRAs or employer sponsored tax deductible retirement plans result in an immediate tax savings equal to the taxpayer's current marginal tax bracket multiplied by the amount of the contribution. It has been shown that many people have a lower income in retirement than during their working years, and thus end up in a lower tax bracket in retirement, and this is another reason why withdrawals from a traditional IRA or tax deferred retirement plan in retirement are likely to result in a lower tax bill. The higher the taxpayer's marginal tax rate, the greater the disadvantage.

• A taxpayer who pays state income taxes and who contributes to a Roth IRA (instead of a traditional IRA or a tax deductible employer sponsored retirement plan) will have to pay state income taxes on the amount contributed to the Roth IRA in the year the money is earned. However, if the taxpayer retires to a state with a lower income tax rate, or no income taxes, then the taxpayer will have given up the opportunity to avoid paying state income taxes altogether on the amount of the Roth IRA contribution by instead contributing to a traditional IRA or a tax deductible employer sponsored retirement plan, because when the contributions are withdrawn from the traditional IRA or tax deductible plan in retirement, the taxpayer will then be a resident of the low or no income tax state, and will have avoided paying the state income tax altogether as a result of moving to a different state before the income tax became due.

• The perceived tax benefit may never be realized, i.e., one might not live to retirement or much beyond, in which case, the tax structure of a Roth only serves to reduce an estate that may not have been subject to tax. One must live until one's Roth IRA contributions have been withdrawn and exhausted to fully realize the tax benefit. Whereas, with a traditional IRA, tax might never be collected at all, i.e., if one dies prior to retirement with an estate below the tax threshold, or goes into retirement with income below the tax threshold (To benefit from this exemption, the beneficiary must be named in the appropriate IRA beneficiary form. A beneficiary inheriting the IRA solely through a will will not be eligible for the estate tax exemption. Additionally, the beneficiary will be subject to income tax unless the inheritance is a Roth IRA). Heirs will have to pay taxes on withdrawals from traditional IRA accounts they inherit, and must continue to take mandatory distributions (although it will be based on their life expectancy). It is also possible that tax laws may change by the time one reaches retirement age.

• Congress may change the rules that currently allow for tax free withdrawal of Roth IRA contributions. Therefore, someone who contributes to a traditional IRA is guaranteed to realize an immediate tax benefit, whereas someone who contributes to a Roth IRA must wait for a number of years before realizing the tax benefit, and that person assumes the risk that the rules might be changed during the interim. On the other hand, taxing earnings on an account which were promised to be untaxed may be seen as a violation of contract - individuals contributing to a Roth account now may in fact be saving themselves from new, possibly higher income tax obligations in the future.

Always talk to a Paisley Advisor before acting due to the constantly changing rules. We'd love to hear from you and answer any questions you may have.

back