The Roth IRA may be one of the most under used retirement income strategies. Due to the deductibility of other retirement saving plans like Traditional IRAs and the 401(k); Roth IRAs are usually just an afterthought. After all who does not want to pay as little income tax as possible? It seems a very simple rational decision. Initially a Roth has no effect on the amount of income tax due because the taxpayer receives no immediate tax deduction.
Today one of the most relevant retirement/tax planning question is –
Do you think tax rates are headed down, stay the same or will they go up in the future?
Clearly if you feel tax rates are going rise at some point then the decision is to pay a smaller tax now or a bigger tax on a larger sum later. A Roth IRA is worth serious consideration, especially if you consider an enhancement by utilizing available lifetime income options.
The new generations of annuities offered today either have income options built in or offer the option to purchase a guaranteed lifetime income rider. Using either of these options the annuity owner has the ability to start lifetime income at a specified age.
If retirement planning is being done correctly income points are identified. These are points in time when a retiree needs to start an income stream.
To help understand the magnitude of the enhanced Roth advantage let’s use a simple example. A future retiree is currently 49, they start contributing to a Roth annuity with lifetime income available as early as age 59 ½. The Roth’s income benefit base has grown to $100,000 with an annual tax free lifetime payout of 5% available ($5,000). Whether or not they actually plan to retire at this early date they should start the lifetime income payout. Why? Because the income is for life, the earlier it is started the greater chance they will live long enough to get into company money. In other words they would receive all of their money, interest earned and then they receive company money for as long as they live. If cost of living increases are built onto our $5,000 yearly income example so much the better.
Besides, even if still working, who wouldn’t appreciate some additional tax free income every year after age 59 ½?
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