investing

Roth IRAs: A Great Tool for Investors Looking for Tax Efficiency

Diversification means more than a mix stocks and bonds: It means tax diversification, too. Roth IRAs can help with that.

One of the best things a financial adviser can do for you is provide strategies that can help preserve your assets against risk. Most commonly, people think of diversifying their investments. But it’s not enough to diversify only your investments; you should also diversify your assets in tax-efficient accounts.

The Roth IRA provides a great tool for investors looking to diversify their taxable assets. Distributions that follow IRS guidelines are completely tax-free. In the future if you face a challenging situation like higher taxes, a Roth IRA will give you the ability to draw tax-free funds and take less from taxable accounts. If you have all your money in one tax bucket, such as a traditional IRA or 401(k) — which many investors do — whatever happens down the road, you will be forced to draw from vehicles that are all taxed the same way, and your money really isn’t diversified, from a tax standpoint.

Roth accounts such as Roth IRAs, Roth 401(k)s and Roth 403(b)s, also provide an excellent option for retirement planning. Twenty years ago, financial advisers followed the conventional wisdom that retirees would not need as much income to live off of. By that logic, retirees would be taxed at a lower rate because they are taking less income.

But this assumption is unlikely to hold up, especially as the national debt continues to grow. At some point, the debt has to be paid back, and the easiest way to do that is by raising taxes. It’s something to keep in mind as you plan your retirement. A Roth IRA might be a good safeguard in case taxes do go up. Putting it simply, if you have a Roth IRA, because it is funded with after-tax dollars, you have a tax-free pass for your money in the future.

Another benefit to contributing to a Roth IRA is liquidity. There is one major caveat on this front: You have to pay attention to the rules for any gains or earnings inside the Roth IRA but, generally, the money you contributed can be pulled out without taxes or penalties.

Roth IRAs are also a great tool for estate planning. Too often, when an investor with a Roth IRA passes away, his or her beneficiaries just want a check — which makes the money taxable, and that often can lead to some nightmarish tax situations. But funds inside a Roth IRA can be transferred to an inherited IRA, clearing up some of the problems that can occur, including major tax liability. This makes Roth IRAs a great legacy for your beneficiaries.

When looking at IRAs, Roth IRAs may make more sense for many investors. Unlike traditional IRAs, Roth IRAs do not have a minimum distribution, a feature that can help investors avoid tax liabilities. One disadvantage of a Roth IRA comes when you want to convert money from a traditional IRA. If done upfront, when the money will be taxed, this can be a major disadvantage. It may be a better strategy to keep money in both traditional and Roth IRAs and limit conversions between them.

You’re never too young to start planning for your retirement, and Roth IRAs provide a good option for younger investors. All of the money put in a Roth IRA will grow and compound during your earning years. Of course, too many investors do not start their retirement planning until much later on. Even then, it’s never too late to put money into a Roth IRA. It’s not a bad option for people nearing retirement.

While they’re not the most trendy of investment options, Roth IRAs offer a host of benefits for investors of all ages and all situations. Any investor or financial adviser planning their retirement should take a look at Roth IRAs.

Kurt Supe, CPA, and Kevin Derby contributed to this article.

Kurt Supe and John Culpepper offer securities through cfd Investments, Inc., Registered Broker/Dealer, Member FINRA &SIPC, and Kurt Supe offers advisory services through Creative Financial Designs, Inc., Registered Investment Adviser. Creative Financial Group is a separate and unaffiliated company from cfd Investments, Inc. and Creative Financial Designs, Inc. Neither cfd Investments, Inc. nor Creative Financial Designs, Inc. provide legal or tax advice.

Securities Offered Through cfd Investments, Inc., Registered Broker/Dealer, Member FINRA & SIPC. Creative Financial Group is a separate and unaffiliated company from cfd Investments, Inc.

About the Author

John Culpepper, Financial Adviser

Senior Partner and Founder, Creative Financial Group

John Culpepper is a financial adviser and insurance professional as well as a senior partner and founder of Creative Financial Group in Indianapolis. John holds a bachelor's degree in business. He began working in the financial services industry in 1997 and has acquired the kind of in-depth knowledge that comes from many years of experience guiding clients through the ups and downs of the economy.

Most Popular

Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022

Recommended

What Is Preferred Stock, And Should I Buy It?
investing

What Is Preferred Stock, And Should I Buy It?

Thinking of adding preferred stock to your portfolio? Read on for a breakdown of the pros and cons to buying preferred shares.
May 26, 2022
Sometimes Renting Is Better Than Buying
investing

Sometimes Renting Is Better Than Buying

A home is an asset that generally appreciates in value, but it might not be the most optimal way to build wealth from an investment point of view.
May 25, 2022
Is Securities-Based Lending a Good Idea?
investing

Is Securities-Based Lending a Good Idea?

Securities-based lending may be a quick way to lay your hands on some cash, but you should be aware of the potential for risk.
May 25, 2022
This Couple Tackles Love and Money as a Team
Getting Married

This Couple Tackles Love and Money as a Team

Fyooz Financial, the husband and wife team of Dan and Natalie Slagle, have carved out a niche advising other couples with the money questions that com…
May 24, 2022