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Retirement planning is a lifetime financial commitment, in that you may need to amass hundreds of thousands, if not millions of dollars, to live comfortably through your Golden Years. The Federal Government structures the Tax Code to encourage long-term investing – in working towards this Herculean Task.

The Roth Individual Retirement Account (IRA) is a particularly important savings vehicle – for that special boost across the finish line. Onyx Investments guides our clientele through Roth IRA structure and contribution limits, before presenting suitable planning recommendations.

Roth IRA Tax Structure

Roth IRA contributions are made with after-tax money. After funding the account, the Roth IRA allows for tax-deferred growth, which means that investment income and capital gains are not taxed, as they occur within the account.

Most importantly, the Roth IRA allows for tax-free withdrawals at retirement, because the contributions have already been taxed. For this reason, Roth IRA contributions and principal may be withdrawn at any time, without penalty.

Roth IRA investment gains, however, are subject to a 10-percent penalty tax if profits are withdrawn before age 59 ½. Here, exemptions to the rule may be made for distributions to finance disability income, childbirth, first-time home purchase, unreimbursed healthcare, and even tuition.

We frame the Roth IRA as the mirror image to Traditional IRA and 401(k) accounts. Traditional IRA and 401(k) contributions are made with deductible, pre-tax money. Future IRA and 401(k) distributions are then taxed as ordinary income.

Unlike Roth IRAs, clients cannot carry Traditional IRA and 401(k) accounts indefinitely, and must start taking required minimum distributions (RMDs) at age 73 and paying taxes. RMD penalties are severe – and you will be paying a 50% tax on the amount of money that you failed to take out.

Yes, the IRS always stands at the ready to demand and take its pound of flesh.

Roth IRA Contribution and Income Limits

For 2023, savers may generally contribute a maximum of $6,500 combined across all IRAs. Investors aged 50 and above may commit to an extra $1,000 in catch-up contributions, for $7,500 in total. Be further advised that the IRS will still accept 2023 Roth IRA contributions right up until April 15, 2024.

For 2024, contribution limits have been expanded by $500 to $7,000 across all IRA accounts. Again, investors who are at least 50 years old may make an additional $1,000 in catch-up contributions, for an $8,000 annual IRA limit.

As a couple, each married partner can open and fund their own Roth IRA account, subject to these same annual contribution limits.

Roth IRA contribution limits are slowly phased down and out for high earners. For 2024, single filers earning less than $138,000 in modified adjustable gross income can make the full $7,000 contribution. From here, the partial contributions are allowed, before being eliminated altogether at $153,000.

For married couples filing jointly, the IRA contribution phase-out band will be from $230,000 to $240,000 AGI in 2024. Tax deductible, Traditional IRA contributions will be further limited, if you are also already covered by a retirement plan at work.  

Financial Strategy

Roth IRA accounts are especially ideal for young professionals, who expect to gradually strengthen earnings power over time and ultimately retire in higher tax brackets. A diligent, young professional saver might consider contributing into his 401(k) up to the employer match, while also funding his own Roth IRA account.

Onyx Investments recommends particular combinations of taxable, Roth IRA, and 401(k) retirement account contributions according to age, financial goals, and risk tolerance. After establishing a functional budget, we allocate cash and investments across separate accounts to finance both medium and long-term life events.

Onyx promotes smart diversification across your total portfolio to mitigate downside financial risks, while also maintaining real upside growth potential.

Against this backdrop, it is best to reserve your most aggressive investments for your Roth IRA, to benefit most from tax-free withdrawals in the future.