Welcome to the October edition of Money Minutes for Doctors. In this installment of our monthly podcast we take a deep dive into the basics of the Roth IRA. This product is slightly different than the 401k and adds another important investment strategy for retirement savings. It is our pleasure to welcome back Katherine Vessenes, JD, CFP®, RFC, Founder and President of MD Financial Advisors for another glimpse into the world of personal financial wellness for physicians and their families.
About Ms. Vessenes:
Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.
Quick Summary…the pros and cons of Roth IRAs:
1. The earnings or growth inside the Roth IRA are not taxable until withdrawn. This can be a significant advantage, as it leaves more funds growing without the headwind of taxes.
2. A Roth IRA is protected from creditors, which is an important consideration for our doctors who are concerned about asset protection strategies. The levels of the protection vary from state to state.
3. The best reason to use a Roth, is tax free income in retirement. If you think you might be in a higher tax bracket in retirement, as 99% of all of our clients will be, then it is crucial to plan to have some income that is tax free.
4. The Roth IRA is one of the few tax shelters left. Almost all of the others have been disallowed by Congress!
5. You can transfer a Roth IRA at death to your heirs without any income taxes, unlike a traditional IRA which can be a great gift for your children or grandchildren.
1. Withdrawals before age 59 ½ are subject to ordinary income tax rates in the year of distribution, along with the 10% penalty, previously discussed. This makes them relatively illiquid.
2. Roth IRAs cannot be used as collateral for a loan.
3. You cannot borrow from a Roth IRA. If you do, it is considered a taxable event.
4. Unless you are converting an existing IRA to a Roth, you can only invest a limited amount each year: $5,500 for doctors under 50 and $6,500 for those who are older. For most of our clients this is just a drop in the bucket for what they will need in retirement.
5. If you do convert your IRA to a Roth, the taxes will have to come from another account if you are under the age of 59 ½. If you are over that age, you can deduct the taxes from the IRA as you convert.
If you are thinking about doing a Back-door Roth or a Roth conversion, we strongly recommend getting some good advice to avoid the IRS pit-falls and penalties.
Takeaway: If you can tie up funds until retirement, then a Roth IRA might be a great choice for you to get tax free income in retirement.
© Katherine Vessenes 2018.