ROTH IRA & WHY YOU MUST KNOW IT IS A POWERFUL TOOL!

I have posted same topic under “What I Would Do If I were In My 20’s & Working (USA)?”

Today, I will elaborate deeper on this topic.

ROTH account is one of the most POWERFUL TAX-FREE strategies for retirement & inheritance portfolios available in the United States. (I believe similar vehicle is available in Canada.)

✅ PROS

1. Tax-Free Growth and Withdrawals. You contribute with after-tax money, but your investments grow tax-free. In retirement, all QUALIFIED (see note 1 below) withdrawals (contributions + earnings) are 100% tax-free.

2. No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t require withdrawals during your lifetime, allowing you to leave funds invested or pass them to heirs tax-free.

3. Flexible Withdrawals: You can withdraw your contributions (not earnings) at any time without penalty or taxes, providing liquidity for emergencies or other needs.

4. Estate Planning Benefits: Heirs inherit Roth IRAs tax-free, though they must take distributions within 10 years (post-SECURE Act rules).

5. Hedge Against Future Tax Hikes. If you expect to be in a higher tax bracket in retirement, a Roth IRA protects you by paying taxes now.

Note 1: Very important to make qualify distributions which requires you to meet BOTH of the following conditions:

1. The 5-Year Rule. The Roth IRA must have been open for at least 5 tax years. The clock starts on January 1 of the year you made your first contribution (not the exact day).

2. A Qualifying Event (Age or Exception). One of these must also apply: You’re age 59½ or older, OR You’re disabled, OR You’re using up to $10,000 for a first-time home purchase (lifetime limit), OR Your beneficiary is making a withdrawal after your death.

Always verify your account’s status and consult IRS guidelines (e.g., IRS Publication 590-B at irs.gov) or a tax professional, as rules can be complex, especially for conversions or inherited Roth IRAs.

❌ CONS

1. No Upfront Tax Deduction as taxes paid upfront: Contributions are made with after-tax dollars, so there’s no immediate tax break, unlike traditional IRAs.

2. Income Limits: Eligibility to contribute is phased out at higher incomes (e.g., 2025 phase-out for single filers starts at $150,000 modified AGI, $236,000 for married filing jointly, based on IRS adjustments).

3. Contribution Limits. Relatively low annual contribution cap compared to 401(k)s (in 2025: $7,000, or $8,000 if age 50+). This means you can’t shelter as much money as quickly.

4. Early Withdrawal Penalties on Earnings. If you withdraw earnings before age 59½ and before the account has been open for 5 years, you may face income taxes + 10% penalty.

WHEN A ROTH IRA MAKES THE MOST SENSE?

1). Expecting Higher Tax Bracket in Retirement than it is today, especially when RMD kicks in at age 73.

2). Tax-free income later for flexibility.

3). You’re younger, with decades of compounding ahead.

4) You already max out employer-sponsored plans and want extra tax-advantaged space.

5). For High earners can use a BACKDOOR Roth (converting traditional IRA contributions into Roth IRA & using part of the convention for tax payments), but this requires careful tax planning to avoid unexpected liabilities.

This summary is my own research & is extracted from a book called “Overtaxed” authored by Ali Hashemian, MBA, CFP. Further updated by Gemini AI, CHATgpt AI & Grok AI.

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