Taxing the Seed
By Vicki Krage, Sunrise Financial Services
They say nothing is certain but death and taxes. And, if we are being honest, no one enjoys paying taxes. Many of us don’t have a problem paying our fair share, especially if we are fortunate enough to see the fruit benefit of our contributions benefit our own communities. The majority of our income sources are taxed in one form or another. Investment and retirement accounts are no exception. Most investment accounts will generally have some sort of tax liability when you make a withdrawal, and it can vary depending on the account type.
In our last article we talked about investing before taxes come out – also called pre-tax – and having to pay taxes on any future withdrawals. This applies to most company plans, Traditional IRAs, SEP IRAs, etc. When you make a contribution to one of these account types, you get the tax benefits upfront. You are planting the seed and taxing the harvest.
Continuing on, we’d like to talk about Roth IRAs. They allow you to invest money you’ve already paid tax on and you’re not taxed on future withdrawals, assuming you meet certain criteria. Essentially, the seed is taxed and the harvest is not.
Roth IRAs are tax-advantaged accounts that, just like Traditional IRAs, can only be owned by an individual. These types of accounts can be beneficial for most people, and especially for younger individuals, because they can let the money grow for a longer period of time before they’ll need it.
Just like most account types, there are some amazing benefits, but also some restrictions.
Benefits of Roth IRAs
- First, and most common, the future tax benefits associated with the account – nothing that comes out of the account in the future will be taxed, assuming you meet the IRS criteria.
- You have the ability to add a contribution to your Roth IRA for a prior year, as long as it is post- marked or deposited before the tax filing deadline of the current year.(example: you can make a contribution to your Roth IRA for 2022 in 2023 as long as it is postmarked or deposited by Saturday, April 15th, 2023).
- You can open a Roth IRA at any time, and technology has made it pretty easy to open an account online.
- Most have a wide range of investment options.
- If you do not have any earned income, normally you wouldn’t be able to contribute to a Roth IRA, but IRS rules allow your spouse to contribute to a Roth IRA on your behalf as long as you file a joint tax return.
Restrictions of Roth IRAs
- You can only contribute up to a maximum of $6,000.00 a year to your Roth, with one exception: if you are age 50 or older, you are eligible to add a “catch up” contribution of $1,000.00 for a total of $7,000.00 a year
- There are IRS established income limits, so if you are over a certain threshold your contribution amount might be less or even zero – (you can find more information about this on the IRS website or by talking to your CPA or tax advisor).
- On the other side of the income spectrum, and revisiting one of the benefits listed above, you cannot contribute to a Roth IRA if you are single and do not have earned income or if you are married and neither of you have earned income(earned income excludes social security, pension payments, investment income from securities, rental income, untaxed combat pay, military differential pay, taxed alimony, child support payments, unemployment benefits, and wages earned by incarcerated individuals)
- The total contribution for an individual or spouses cannot exceed the amount of earned income they have (example: If you are single and you made $3,000.00 of reportable income working in a calendar year, you can only contribute up to $3,000.00 to your Roth IRA for that year)
These are just a few of the benefits and restrictions. If you are interested in learning more about contributing or withdrawing from your Roth IRA, it is recommended you speak to a financial or tax advisor before moving forward. Each person’s situation is different and a Roth IRA may not be right for everyone.
If it is a good option for you, a professional can assist you in navigating the IRS rules associated with the Roth IRA, and potentially help you to avoid making any costly mistakes. We are here to help as well. Feel free to reach out to us at 206-420-8520 or by email at office@sunrisefinancial.net to arrange a complimentary consultation.
Securities and advisory services offered through Madison Avenue Securities, LLC. (MAS), Member FINRA/SIPC and a Registered Investment Advisor. MAS and Sunrise Financial Services are not affiliated companies.
Please note, this article is is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Our firm is not permitted to offer and no statement made during this presentation shall constitute tax or legal advice. Consult your tax or legal advisor regarding your situation.
