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The Value of Opening a Roth IRA at the End of the Year

The Value of Opening a Roth IRA at the End of the Year EGSI Financial

These days, retirement planning will likely involve Individual Retirement Accounts in one way or another. Whether you’re looking to rollover a 401(k), optimize your withdrawal timing, or take advantage of catch-up contributions, your IRA strategy may be one of the main components of your income during retirement. So, let’s talk about the Roth IRA and its unique value at the end of the calendar year.

What is the Roth IRA and When is it Useful?

The Roth IRA is a certain type of retirement account that you may withdraw from tax-free after a certain age and after holding it for a period of time. Your Roth contributions are after tax, meaning that contributions are still counted as income. On the other hand, the Traditional IRA deducts your contributions from your income for the current tax year and is taxed as regular income during the year you withdraw. Also, note that there are contribution limits that reset after each calendar year.[1]

Roth IRAs can be useful when executing a retirement tax strategy. If you’re looking to control your taxable income levels and tax brackets in retirement, Roth IRAs and Traditional IRAs can be used together in a comprehensive income strategy over the course of your retirement timeline.

Why Open a Roth at the End of the Year?

When it comes to a Traditional IRA, as long as you are 59.5 years old, you can withdraw from it whenever you want[2]. You’ll probably consider opening a Roth IRA if you want to take advantage of its tax-free withdrawal benefits, but you should remember, you can’t withdraw penalty-free from the account before 59.5 years of age and holding the account for 5 calendar years. In addition, your contributions will be subject to the IRA contribution limits for that year[3].

So, here’s the strategy: If you’re thinking about opening a Roth IRA for whatever reason, do so before December 31st, and max out your yearly contributions for the current year.  Then, after January 1st of the following year, max out your contributions for that year as well. This strategy allows your account to be categorized as having been opened for the current year and you can max out your contributions for both years! Essentially, you’ll be able to withdraw from the IRA after 4 years instead of 5 if you slip in just before the turn of the year, and you’ll be able to fund your account more quickly than you would have otherwise.

Your IRA strategy may be crucial to your retirement plan, but there is no one right way to do it. Your strategy is unique to you and your financial situation, so if you have questions about if a Roth IRA can work for you, sign up for a complimentary review with us today.


[1] https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/

[2] https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp

[3] https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp

Advisory services offered through EGSI Investment Management, Inc., a Registered Investment Advisor with the State of Ohio.  Insurance services offered through EGSI Financial, Inc. Guarantees offered with insurance products are based on the claims-paying ability of the issuing company.  Investing may involve risk and may result in the loss of principal. Ohio Insurance License # 619337. Please contact EGSI Investment Management if there are any changes in your financial situation or investment objectives, or if you wish to impose, add, or modify any reasonable restrictions to the management of your account, EGSI Investment Management Form ADV Part 2A&B is available for your review upon request.

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