Don’t make these costly mistakes with your Roth IRA.
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The decisions on how to invest, when to retire and other financial planning topics are some of the most important financial decisions you will make in your life. I urge you to seek professional financial advice as you make this decision. Ideally from a financial adviser, AND a CPA AND an attorney. Having the perspective of all three professions will help you make the decision that is right for you and your family.
This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor may NOT be suitable for all investors.
This information is NOT intended to, and should NOT, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, and/or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
I don’t believe in “get rich” programs. Rather, I believe in doing your homework and working with professionals who are a fiduciary to you 100% of the time….(read more)
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🚨 7 CATASTROPHIC Roth IRA Mistakes You MUST AVOID
Planning for retirement can be a daunting task, but Roth IRAs have long been hailed as a great way to save for the future. These tax-advantaged retirement accounts offer numerous benefits, such as tax-free growth and tax-free withdrawals in retirement. However, like any investment strategy, there are potential pitfalls that individuals need to be aware of. Here are seven catastrophic Roth IRA mistakes that you must avoid:
1. Failing to start early: Time is an investor’s best friend, and the sooner you start contributing to a Roth IRA, the more time your investments have to grow. By delaying contributions, you are missing out on potential years of tax-free growth.
2. Not understanding contribution limits: Roth IRA contributions are subject to an annual limit set by the IRS. Failing to understand these limits could result in unnecessary tax penalties. Currently, the contribution limit is $6,000 per year for individuals under 50 and $7,000 for individuals 50 and older.
3. Ignoring income limits: Roth IRA contributions are also subject to income limits. If your income exceeds these limits, you may be prohibited from contributing directly to a Roth IRA. However, there are alternatives such as a backdoor Roth IRA that may allow high-income earners to still benefit from this retirement strategy.
4. Neglecting diversification: Roth IRAs offer a wide range of investment options, including stocks, bonds, and mutual funds. Failing to diversify your investments can leave you vulnerable to market volatility. Consider diversifying your portfolio across different asset classes to mitigate risk.
5. Withdrawing earnings too early: Roth IRAs have unique withdrawal rules. While contributions can be withdrawn penalty-free at any time, if you withdraw earnings before the age of 59½, you may incur taxes and penalties. It’s important to allow your investments to compound over time and resist the temptation to tap into your account early.
6. Inadequate estate planning: Roth IRAs can be powerful estate planning tools. By designating beneficiaries, you can pass on tax-free income to your loved ones. Failing to update beneficiaries or establish contingency plans may result in your heirs losing out on these valuable tax advantages.
7. Overlooking Roth IRA conversions: If you have a traditional IRA or a 401(k), consider taking advantage of Roth IRA conversions. While this may trigger a tax liability in the short term, the long-term benefits of having tax-free withdrawals in retirement can outweigh the immediate cost.
Saving for retirement is a critical financial goal, and utilizing a Roth IRA can be an effective strategy. By avoiding these catastrophic mistakes, you can maximize the potential of your Roth IRA and take full advantage of its tax benefits. Start early, educate yourself about contribution and income limits, diversify your investments, understand withdrawal rules, plan your estate, and consider Roth IRA conversions. By doing so, you’ll be on the right track towards a more secure and comfortable retirement.
Thanks, Azul. As always, great video, and indeed, the only Roth YouTube video I've seen today from a ferry. 🙂 I definitely agree with your recommendation to not risk having a check sent to you as an intermediary between custodians, but I once knew a guy who, back in 2008 when the market was moving downward, was in the process of moving his retirement funds from one custodian to another. He received a check from the old custodian, put the check in his desk drawer and forgot about it for a few weeks. Meantime, the market hit its bottom before he recalled having that check. As a result, he was able to get back in the market with many more shares than when he had exited the market. Just a fluke, though, kids. Don't try this at home!
Great info and interesting way of communicating it to us. I’ve never heard of a Backdoor Roth Conversion, but will sure enough look into it.
Added factor:
Consider your current tax rate vs. future. Example: In my later pre-retirement years, my income was 3X higher (my income tax rate was higher, too). Thus, the value of tax-deduction in the year of contribution was more than the savings in the future at a lower rate (thus, used deductible Traditional IRA). I used ROTH years ago with lower income.
Summary:
Traditional IRA: Guaranteed ROI from immediate tax-deduction savings.
ROTH: Likely reduced ROI from reduced future tax rate. Possible non-benefit from prolonged market loss/stagnation. Plus: If left in for a long time and market gains the benefit can be huge.
You have a great channel Azul, keep up the good work!
Nice scenery
Maybe a video about using whole life insurance policy as an investment ie: college education or loan for yourself. Thanks for keeping videos short.
Very well explained. Roths are incredible!
Something that I have wondered about is if someone could open a Roth for someone else like a new born grandchild as a gift and then contribute some $ every year as a gift?
“Catastrophic” is a little click baiting don’t you think? It’s like “ eat this one thing to lose 50 pounds”. You get the idea.
What is a custodian to custodian transfer? I’m sorry, I don’t know a lot about finances.
In Canada we're lucky that with our equivalent of the Roth IRA (called a TFSA) does roll over year after year so if you don't make a contribution one year you can always contribute that amount in a later year.
Thank you. I’m 67 and I’d love information on what to do with my Roth IRA at this point. My wife and I were both educators so we have our state pensions, small Roth IRA , tiny SS, and small savings. I want to attend to the ROTH correctly. Thank you for your work. Ken
What repercussions would one face converting a traditional Ira to a roth? Is it worth it in your opinion?
Is there a reason why a person would not do Roth conversation? My tax person says no since later in life I’ll be in a lower tax bracket so it won’t benefit me ??
Do you think you could make a video about "social Security’s Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) penalize educators, police officers, and other state and local government employees who dedicate their lives to public service." This topic was a little bit of a shock to my wife and I while doing our retirement planning….. since she is a teacher. Probably a hard topic but not many discuss/put videos out on it.
I enjoy the video format. Just would enjoy knowing where some of the locations are. Keep up the great work!
Great video Azul. Keep em coming.