4 Things You May Not Know About Roth IRA's

Michael Cirelli |


One of the most common misconceptions I run into when working with someone is that they think they need to invest $5k or more to get their Roth started. While many of your larger banks or wire houses may require you to have 10/25/50k to get started this is not the case when working with me. I work with many baby boomer clients who this blog may not apply to but I also work with millennials who have questions or would like to know more but are under the impression they need to come to me with a few thousand dollars to ask their questions or discuss their situation. This couldn't be further from the truth. I have many meetings where we both agree that waiting until they have more free cash flow is the best option for their situation. That being said, I have many options for younger clients who know they can't max out their Roth IRA but they at least want to start putting a little something  away every month. In my investment arsenal I have companies who will allow my millennial clients to get started with as little as $250-$1000 and going forward they can contribute as little as $50/month after that. While that may seem like an insignificant amount of money to begin investing with I can certainly show you data compiled over 30-40 years suggesting quite the contrary.



As I'm sure many of you know, the earnings in a Roth IRA grow tax free until distributions are taken in retirement. This is the single greatest benefit of a Roth IRA over a traditional IRA who's earnings grow tax-deferred and not tax free. Another excellent benefit of a Roth IRA is the fact that Uncle Sam is not going to force you to begin withdrawing your money at the age of 70 1/2. You may or may not know that if you have a traditional IRA and have reached age 70 1/2 you will need to begin taking Required Minimum Distributions (RMD's). Fortunately for you though this is not a requirement if your money was invested in a Roth. In what situations would this feature be beneficial you may ask? Suppose you retire at 65 and start taking social security as well as receiving a pension from your previous employer. Many people in this situation may not need to take distributions from their IRA accounts but once they've reached the age of 70 1/2 they will be forced to. Traditional IRA's have this mandate, Roth IRA's DO NOT. This means your money can continue to accumulate tax free until YOU choose when is the best time to start using it. I enjoy being in control of my money so I strongly prefer having the ability to decide when is best for me to take my money out as opposed to having the government force my hand.



Yes, one unfortunate feature of Roth IRA's is that they have income limits attached to them which could prevent you from contributing to one if your income exceeds the thresholds set by the government. This is when working with a knowledgeable financial professional can bring real value. There are ways to convert money into a Roth IRA even when it seems as if you cannot. If you fall into this category, which certainly isn't a bad problem to have, seek a financial advisor who can show you ways to work around  this rule.



Yes, it's not too late! Even though it's 2017 you still have until April 15th of this year to make a backdated Roth IRA contribution. It's a little known secret and many people don't even realize it but this allows you to make a contribution now and it doesn't go against your contribution limit for 2017. Meaning you can actually contribute $11,000 this year but you only have about a month to get your 2016 contribution in, so time is of the essence.