Roth IRA Explore the Opportunity 2 RBC Wealth Management
N o w Y o u H a v e E v e n M o r e F l e x i b i l i t y i n H o w Y o u I n v e s t f o r Y o u r F u t u r e Retirement a time that you work for and dream about for years. But, do you have a plan to provide the income you will need during your retirement years? Whether you are just beginning your career, or retirement is just around the corner, the more you save today, the better prepared you will be tomorrow. IRAs are easy, powerful tools to help you meet your retirement savings goals. There are two types of IRAs, traditional IRAs and Roth IRAs. Traditional IRAs are generally funded with pre-tax deposits, meaning you received a tax deduction. Assets in traditional IRAs grow tax-deferred, and distributions are subject to ordinary income tax. In contrast, you make contributions to a Roth IRA after you ve paid income taxes. However, qualifying Roth distributions are tax-free. W h y C h o o s e a R o t h IRA? Roth IRAs offer an opportunity for you to save for retirement and ultimately withdraw both your contributions and earnings tax-free. Additional benefits of a Roth IRA include: n No required minimum distributions for you or your spouse; n Roth IRAs pass tax-free to your beneficiaries; n Because distributions are tax-free, a Roth IRA allows you to protect your retirement savings from the prospect of rising taxes and provides you with greater tax management flexibility in the future; and n Under current law, a tax-free distribution from a Roth IRA will not impact the taxability of your social security benefits. RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. Roth IRA 1
within five years of the conversion you may have a pre-mature penalty tax on your basis unless you are over 59½ or another exception applies. A distribution is completely tax and penalty free if it is a qualifying distribution. A distribution is considered qualifying if your Roth IRA has been open for at least five years and you are 59½ or older, or in the event of disability or death, or for a qualifying first time home purchase ($10,000 lifetime limit). With favorable tax benefits like these, Roth IRAs are an attractive way to save for retirement. F u n d i n g a R o t h IRA A Roth IRA can be funded either by annual contributions (eligibility requirements apply) or by converting assets from a traditional IRA or an employer-sponsored retirement plan, such as a 401(k), to a Roth IRA. As of January 1, 2010 all taxpayers are eligible to convert assets to a Roth IRA, and have the opportunity to enjoy the potential benefits of a Roth IRA. T a x C o n s e q u e n c e s o f a R o t h C o n v e r s i o n While the tax bill for all pre-tax amounts that are converted is payable the year in which you convert, the potential for tax-free growth may outweigh the impact of paying income taxes on the amount at the time of conversion. D i s t r i b u t i o n s F r o m R o t h IRAs Once you have paid your tax bill you can withdraw the converted amount or annual contribution (or basis) at any time. However, in the case of conversion, if your distribution is made Is a Roth IRA Right f o r You? There are many things to consider when deciding if a Roth IRA is the smart choice for you. You may want to consider a Roth if you will not be withdrawing the money for a while and believe that your tax rate will increase in the future. This could be because your income will be higher or you believe that federal income tax rates will increase. Having assets in multiple types of accounts, such as traditional pre-tax retirement accounts, Roth IRAs and taxable accounts can provide you with future tax diversification. You may also want to convert to a Roth IRA if: n You want to take distributions from your IRA on your terms, not because they are required. n Your IRA or retirement account is made up in part with assets that have already been taxed. n For estate planning purposes, you would like to pay taxes now to reduce your taxable estate. n You do not want your heirs to pay taxes on distributions when they inherit the assets or you believe they will be exposed to higher tax rates than you will experience at the time of conversion. To get the greatest benefit from a conversion you want to pay the conversion tax out of pocket instead of dipping into your retirement account. 2 RBC Wealth Management Roth IRA 3
Depleting your retirement account to pay taxes could erode the advantages you might otherwise gain through the Roth IRA. Keep in mind, if you make a Roth conversion and it turns out not to be advantageous, IRS rules allow you to undo or re-characterize the conversion (within certain time limits). C o n s i d e r a t i o n s While Roth IRAs offer many benefits, converting to a Roth IRA may not be suitable for everyone, especially if you expect your tax bracket to be lower in retirement. Other reasons why you may not want to convert to a Roth IRA include: n You do not have extra money to pay the taxes and would have to use your IRA assets. n A conversion would push you into a higher tax bracket. n You may need money from your Roth IRA before it s been open for five years. M a k e a n I n f o r m e d D e c i s i o n With so many details to consider, the good news is that we can assist you and your tax advisor in reviewing your circumstances and help you decide if a Roth IRA is appropriate for your immediate needs and long-term goals. Should you determine that a Roth IRA is a smart choice for you, we will work together to create a plan that will help you build and preserve your assets and achieve your retirement goals. 4 RBC Wealth Management Roth IRA 5
RBC Wealth Management is not a Tax Advisor. All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor. 21213 (09/11) 2011 RBC Capital Markets, LLC. All rights reserved.