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By Jim Glass, JD
IRA Analyst

Question:

Mr. Slott, My 45 year old daughter’s financial advisor has recommended for her NOT to put retirement contributions into a Roth IRA! His reason being that by paying taxes up front for a Roth, there is less money to grow!  Also, that by the time my daughter gets to retirement age, the Roth benefits may have changed! I disagree with her advisor due to the attractive benefits of the Roth and no RMD dictated by the government.

I would be very interested to read your thoughts on the above. I thank you.

Mary

Answer:

Hi Mary:

Income tax is imposed on Roth IRA funds when contributed and on traditional IRA funds when distributed. If the tax rate is the same the final post-tax dollar amount will be the same either way. So it’s also hard to understand what he means when he says that by making Roth contributions she has less money to grow. A $5,500 contribution to the IRA or Roth IRA should produce the same balance in either account at retirement.

But today’s income tax rates are at an historic low. If rates rise in the future, in response to projected growing deficits, this will make traditional IRAs relatively more costly.

Moreover, Roth IRAs have these advantages over traditional IRAs:

  • With no RMDs, as you note, funds can accumulate in the Roth IRA longer.
  • They can fund tax-free bequests. With no RMDs tax-free savings can accumulate in a Roth IRA for heirs. If your daughter has children of her own she may appreciate this.
  • Contributions (but not earnings) can be withdrawn from a Roth IRA tax and penalty free at any time.

And politically, the tax treatment of Roth IRAs probably is among the safest of tax breaks. Congress sees Roth IRAs as a short-term revenue raiser because contributions to them aren’t deductible. There have already been Congressional attempts to “Rothify” other forms of deductible retirement savings by replacing them with Roth-type accounts. So the treatment of Roth IRAs seems as secure as any tax break can be.

Question:

My husband was forced to retire early from his company as many are over 55 years of age even though company policy clearly states they do not “age discriminate”.  Now, we are forced to pull from our IRA to pay bills.  Somewhere I read that if you are 55 or older and have no other income, you may be able to avoid the penalty.  The IRS paperwork is not clear to either of us.  Can you answer my question?

Lori

Answer:

Hello Lori:

Generally, a 10% early distribution penalty applies to funds withdrawn from a tax-favored retirement savings account before age 59 ½.

There is an age 55 exception but it applies only to persons who (1) are age 55 or over when leaving a job and (2) take a distribution from the retirement plan of the employer they left.  Unfortunately, it does not apply to withdrawals taken from IRAs. There are other exemptions to the penalty that might apply in your situation such as medical expenses that would be deductible or higher education expenses if you have children in college. Alternatively, you could set up a 72(t) payment schedule which would give you penalty-free payments. You would have to maintain the payment schedule for 5 years with no changes to the schedule or the account during that time. If your husband is close to age 59 ½, this may not be a good alternative for you.

https://www.irahelp.com/slottreport/roth-iras-72t-payments-todays-slott-report-mailbag