Most of us understand how a Roth IRA works: contributions within specified limits are not deductible currently; earnings on the underlying investments grow income tax free; withdrawals are not subject to tax; and, required minimum distributions are not required to be withdrawn at any age. Distributions from a Roth that are made prior to age 59½ are subject to a 10 percent tax penalty, and there are other requirements as well
What you may not have known, however, is that for married couples who file a joint return, the taxable compensation from either spouse can be used to meet the requirement for both spouses. If you and your spouse choose to file separate returns, each of you must have taxable compensation.
As an example, assume that Joe is the sole breadwinner and his modified adjusted gross income for 2013 will be less than $178,000. Joe and his wife, Jill, may each make a Roth contribution of $6,500 in 2013, if each is older than 50. If either spouse is younger than 50, the maximum contribution for the younger spouse is limited to $5,500.
An even better deal is available if your employer offers a Roth 401(k) plan or a Roth option to its traditional 401(k) plan. The contribution limit to your 401(k) (traditional or Roth) is limited to $17,500, or $23,000 if you are over 50. If your employer makes a matching contribution, that amount will go into a regular pretax 401(k) plan.
The fact that Roth 401(k) plans do not have income limits, means that highly compensated employees, with adjusted gross incomes greater than $188,000, can make large Roth contributions. As a result, there will be no need for such an individual to convert a traditional IRA into a Roth in order to enjoy the benefits of a Roth at distribution time.
One drawback to a Roth 401(k) plan, however, is that you will be required to take minimum distributions beginning at your age 70½, unless you are still employed by that employer. Thankfully, there is a simple solution to that potential dilemma – simply roll your Roth 401(k) monies into a regular Roth IRA before you reach 70½.
On another topic, two Target Date 2050 mutual funds that you may want to discuss with your broker are Vanguard Target Retirement (VFIFX) and American Funds Target Date Retire (AALYX). Fees for the Vanguard fund are extremely low; historical returns have been solid; and, fluctuations in value have been less than average for such funds. The benefit of the American Funds fund is that the underlying accounts are among the best, such as Washington Mutual Investors.
Switching gears again …. Given the fact your personal information is being kept on file by such a wide range of entities, all the way from your employer to your banker to your personal trainer may signal the need to consider an identity-theft service. Such services do have limitations, since no service can guarantee that it can prevent your personal information from being lost or stolen.
What these services can do is to alert you to the fact that your identity may have been stolen. These services then will typically notify your credit card companies of the possible security breach, and subsequently assist you to determine that the most appropriate next steps.
By using an ID-theft service, you may be able to find out fairly quickly if someone has applied for a credit card using your identity.
Costs for these identity theft services can range from $10 per month to as much as $25 per month, depending on how much monitoring you are willing to pay for. Before you sign up, check with your bank or insurer to ascertain if they offer discounted protection. AARP members get a $15 discount from one such service.
Much of the information in this column can be found in the September edition of Kiplinger’s Personal Finance Magazine.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at firstname.lastname@example.org.