If like many people you took compounded losses in 2008, you may be still working toward recovery. And wondering if you will ever be able to retire.
That place in the sun? It's for someone else, you may think. I would suggest revising this attitude. "Lean In." Hard times and slow recoveries just create more incentive to be creative.
Roth IRAs might be one strategy to consider, if your nest egg is still too small to consider full retirement in the next 5 to 10 years, or longer. Such an account might also help those who already broken open their IRAs in the lean years, and who want to reconstruct them now.
Financial planners such as myself would look at the relative age of a person and his or her earning potential in the remaining years before retirement, in assessing whether a Roth account makes sense. Income limitations or participation in employer retirement plans should not be a deterrent.
Higher earners blocked from direct contributions to a Roth account can use the "backdoor" approach afforded by conversions of traditional IRAS to Roths. Conversions are not subject to income limitations as are direct contribution methods.
To know whether your income exceeds the limitations set by the IRS for direct contributions, visit the Internal Revenue website at www.irs.gov, and search for Roth income limitations. These limitations change yearly, but generally start at $127,000 for a single person and $188,000 for married filing jointly. See http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000230977 for more information.
At age 70-1/2, there are no distributions necessary from Roth IRA accounts, unlike from traditional IRA accounts. And withdrawals are completely tax free after age 59-1/2, assuming the Roth account has been in existence for at least 5 years. For withdrawal rules before age 59-1/2, please see the www.irs.gov website.
Having tax free income in retirement can benefit people who under-saved for their needs. They can also benefit people who will enter higher tax brackets because of pension or trust income. Not having the income tax to pay may be equivalent to a boost in Roth portfolio yield equal to your tax bracket, as an example, anywhere from 10 percent to 35 %. There is no gains tax, either.
When you start to draw from retirement accounts, consider delaying taking from the Roth IRA as long as possible, so that it continues to grow tax free. However, should you need to manage your taxation rates, you might instead take some income from the Roth IRA rather than a traditional IRA to avoid slipping into the next tax bracket. And paying more tax.
You can also time the withdrawals from the Roth IRA for the year's a pension may be kicking in, for you or a spouse. In this way you don't further increase your taxable income.
Finally, rebalance the Roth IRA account, just as you would allocate investments in other accounts. It's easy for investments to get out of whack, so annual rebalancing is a must. In the early years of accumulation in a Roth, you may have chosen high growth stocks, because the gains can accumulate without any tax. When you take income, you may need to divest some of these, to start focusing on investments that pay interest and dividends.