Author Topic: Possible negatives of Roth IRA  (Read 3896 times)

adasafa

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Possible negatives of Roth IRA
« on: October 17, 2013, 08:05:00 AM »
I am thinking of opening Roth IRA's for both my parents. My dad is self employed and my mom does not work. My understanding is that my mom should also be able to contribute to her own Roth IRA as long as my dad has enough taxable income to meet the requirement.

Are there any negatives to opening a Roth IRA? I am particularly concerned with Roth IRA affecting their Social Securty, Medicaid/Medicare, etc... in the present and future (they are in their fifties).

sherr

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Re: Possible negatives of Roth IRA
« Reply #1 on: October 17, 2013, 08:30:04 AM »
The only negatives to a Roth IRA are:
1) If your tax rate while working is higher than your tax rate in retirement (likely) then you'll pay more in taxes than opening an equivalent Traditional IRA.
2) You can't take qualified distributions from your Roth IRA until 5 years after you opened the account. So if your parents were to retire in 2 years they wouldn't be able to take any money out for another 3. This limit does not apply to Traditional IRAs.

Yes you mom could also contribute to her own IRA *as long as they file taxes jointly*. If they file separately she'd have to earn her own income in order to contribute to her IRA.

Edit: To make it more clear, having an IRA (Traditional or Roth) does not affect Social Security, Medicaid, etc.
« Last Edit: October 17, 2013, 08:33:16 AM by sherr »

Petunia 100

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Re: Possible negatives of Roth IRA
« Reply #2 on: October 17, 2013, 12:50:22 PM »

2) You can't take qualified distributions from your Roth IRA until 5 years after you opened the account. So if your parents were to retire in 2 years they wouldn't be able to take any money out for another 3. This limit does not apply to Traditional IRAs.


This rule is for earnings.   Contributions are available for withdrawal at any time for any reason, no taxes or penalties.

Dezrah

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Re: Possible negatives of Roth IRA
« Reply #3 on: October 17, 2013, 01:46:11 PM »

2) You can't take qualified distributions from your Roth IRA until 5 years after you opened the account. So if your parents were to retire in 2 years they wouldn't be able to take any money out for another 3. This limit does not apply to Traditional IRAs.


This rule is for earnings.   Contributions are available for withdrawal at any time for any reason, no taxes or penalties.

Technically you're both correct.  If a traditional IRA is rolled into a Roth IRA, the event is taxed and there is a 5 year seasoning period where neither the principle nor interest may be withdrawn without penalty.  If you take post-tax income and contribute directly to the Roth IRA with no intermediate step, then you can draw up to the initial deposit, but not the earnings, without penalty.  In both cases, it is not possible to put the money back once it has been withdrawn.

The only downside I know of for a Roth account is like sherr said, you might be taxed at a higher rate now than in the future.  However, if this is the case and you’ve already maximized whatever other taxed-deferred retirement accounts are available, then you will still save money with this route versus leaving it in a taxable investment account. 

Personally, I believe that taxes are going to go up across the board for all brackets in the future and I’ll still come out ahead even though we’re at a high bracket now.

Actually as an afterthought, it does occasionally get mentioned that the rules about Roths might be changed in the future such that the government taxes them anyway (think “wealth tax”), but that seems unlikely to happen anytime in the next decade or two.

Wikipedia actually has a surprisingly helpful page on Roth IRAs, so check them out in your research.

adasafa

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Re: Possible negatives of Roth IRA
« Reply #4 on: October 17, 2013, 02:11:45 PM »
Thanks everyone for your input. In my research of Roth IRA's I did not come across anything that suggested it would affect someone's Social Security benefits/medicare/tax bracket/etc. I just wanted to double check to be sure before opening up the Roth IRA for my parents.

SunshineGirl

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Re: Possible negatives of Roth IRA
« Reply #5 on: October 17, 2013, 03:53:09 PM »
Why couldn't they open their own if they wanted to?

adasafa

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Re: Possible negatives of Roth IRA
« Reply #6 on: October 17, 2013, 04:52:06 PM »
Why couldn't they open their own if they wanted to?

Mainly due to not knowing much about savings. I just began to learn about savings/retirement/etc in the last couple of months and come to realize my parents don't have much of a plan. I figure I'd help them go in the right direction.

Additionally they have language/computer limitations.