3 Roth IRA Myths You Can’t Afford to Believe

By Jeffrey Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott

Roth IRAs are powerful retirement savings tools… if you used correctly. Here are 3 Roth IRA myths you simply can’t afford to believe.

  1. You’re Too Old to Convert to a Roth IRA

Please, please can we once and for all get rid of the notion that age has anything to do with whether or not you should convert to a Roth IRA?! It doesn’t!

That’s not to say that, on average, a Roth IRA conversion will make sense for the same amount of 80 year-olds as 40 year-olds. It doesn’t. But that’s not really due to age so much as it is other factors, such as current vs. future expected tax rates. That said, there are plenty of reasons people in their 70s, 80s or even older should consider making a Roth conversion.

For instance, making a Roth conversion increases income in the year of conversion, but it can lower income in subsequent years. That can help seniors keep more of their Social Security income away from Uncle Sam, while also helping keep Medicare Part B premiums lower.

In another scenario, perhaps you are a 70 or 80 year-old in a low income tax bracket, but your beneficiaries are still working and are in much higher brackets. Converting now, at your lower bracket can help keep down the cumulative tax bill that will be owed on your retirement funds. There are any number of possibilities, but the point is simple. Just because you are 75, 80 –or whatever age you want to insert – it doesn’t automatically make you too old to make a Roth IRA conversion.

  1. There is a 5-Year Waiting Period to Take Distributions

No, there’s not. There’s no waiting period to take distributions from a Roth IRA. There are, in fact, two separate Roth IRA 5-year rules that you may have to deal with at some point, but neither of them has anything to do with preventing you from taking money out of your Roth IRA. Instead, those rules just deal with the tax consequences of your Roth IRA distributions.

  1. You Have to be Age 59 ½ to Access Roth IRA Money Tax and Penalty Free

In general, you have to be age 59 ½ and have established a Roth IRA at least 5 years ago in order for everything in your Roth IRA to be tax and penalty free for life. But that doesn’t mean you can’t access any Roth IRA money tax and penalty free sooner. In fact, not that it’s a good idea, but in many situations, you can put money into a Roth IRA and turn around and use it tomorrow without any tax or penalty – regardless of your age or the reason for your withdrawal.

Roth IRA contributions can be distributed at any time without incurring any tax or penalty. And here’s the even better part… your Roth IRA contributions are always considered to be the first money out of your Roth IRA (for distribution purposes all of your Roth IRAs are treated as one account). Every dollar of contributed money comes out tax and penalty free before a single dollar of earnings – which may be taxable and/or subject to a 10% penalty – are distributed.

Funds that have been converted to a Roth IRA often receive the same tax treatment. They are always tax free. After all, you paid the tax on those funds when you made your Roth conversion, didn’t you? In addition, they will also be penalty free if your conversion took place more than five years ago or if you are already over 59 ½.

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