Building Your Nest Egg: Understanding the Roth IRA

Building Your Nest Egg: Understanding the Roth IRA

There are numerous factors to consider when selecting an individual retirement savings plan. Regardless of whether you choose a traditional individual retirement account (IRA) or Roth IRA, planning for retirement is always a step in the right direction. To learn more about the Roth IRA and help you determine if it’s right for you, review the basics below.

What is a Roth IRA?

A Roth IRA is a retirement savings plan that allows the plan owner to contribute after-tax dollars, and cultivate those funds through investments on a tax-free basis. Funds in a Roth IRA may be invested in stocks, bonds, mutual funds, annuities and, in some specific cases, real estate. They can also be purchased from banks, so that the underlying investments would be standard banking products such as CDs and bank money markets. When the plan owner wishes to retrieve funds from the plan in retirement, he or she is not taxed at the time of a distribution that is qualified. This is the primary difference between a Roth IRA and a traditional IRA. Traditional IRAs are taxed at the time of distribution, rather than at the time of contribution. In addition, Roth IRAs are not subject to required minimum distributions.

Who can contribute to a Roth IRA?

Anyone may contribute to a Roth IRA at any time throughout the year, as long as they are within the modified Annual Gross Income (AGI) limit requirements as set by the IRS. To be eligible to contribute to a Roth IRA in 2018, one must meet the following AGI limit requirements:

• If you are married and filing jointly, or you are a widow or widower, your modified AGI may not exceed $199,000.

• If you are filing as single, the head of the household or married filing separately and you did not live with your spouse in 2018, your modified AGI may not exceed $135,000.

• If you are married and filing separately, and you lived with your spouse in 2018, your modified AGI may not exceed $10,000.

How much may be contributed each year?

Like modified annual gross income limits, the IRS sets annual contribution limits each year. For 2018, contributions to a Roth IRA may not exceed the lesser of:

• $5,500 if you are under the age of 50 – or $6,500 if you are over 50 – minus other contributions to other IRAs that you make in the year, or

• Your taxable compensation minus other contributions to other IRAs that you make in the year.

If you exceed the contribution limit when funding your Roth IRA in any given year, you will be subject to a 6 percent tax that is applied to any excess contributions.

When can I retrieve my funds?

Since the sole purpose of the Roth IRA plan is to accumulate money for retirement, in most cases, it is best to leave the funds intact until at least age 59 ó, the age in which you may begin withdrawing from the plan without complication, as long as the Roth IRA has been established for at least five years. However, if you need to make an early withdrawal, you may typically withdraw from your Roth IRA contributions free of penalty, at any time, as long as you don’t withdraw from what you have earned from investments. If you withdraw more than what you’ve contributed, you will begin to dig into your earnings, which carries a 10 percent tax penalty on those distributions in addition to income tax on the earnings portion. You may not have to pay penalty in the following situations:

• If you are paying for qualified expenses associated with higher education

• If you suffer total and permanent disability

• If you are the beneficiary of a deceased Roth IRA owner

• If you have to pay for unreimbursed medical expenses that are more than 7 ó percent of your AGI

• If you are a first-time homebuyer and need up to $10,000 for costs

• The distributions are part of a series of substantially equal payments

• Distribution of the funds is due to an IRS levy

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Retirement Income Strategies

Read about how you can set up income strategies that will have a long-term effect for your retirement years.

Building Your Nest Egg: 401(k) Explained

Building Your Nest Egg: 401(k) Explained

When most of us think about retiring, it is easy to picture ourselves having a comfortable cash cushion to sit on, but we often experience uncertainty when trying to figure out how to inflate that cushion. Sorting through and understanding retirement options can be a confusing and daunting task. If you are planning for retirement and a 401(k) is available to you, it may be a beneficial option for you to explore. To help you better understand what a 401(k) can do for you, review the following essentials.

What is a 401(k)?

A 401(k) is a tax-deferred retirement plan that is commonly offered by employers as an added benefit to their employees. The name of the retirement plan, 401(k), derives from its section of the Internal Revenue Code, and has become one of the most commonly used employer-sponsored retirement programs.

Putting the Money In

There are multiple ways that a 401(k) can be funded:

Employee contributions

Employee select a tax – deferred dollar amount or percentage of their salary to be placed into their retirement fund.





Non-elective contributions

Employers contribute a specific dollar amount or percentage of the employee’s salary to the employee’s account.




Matching contributions

Employers contribute to the employee’s retirement fund based on a specific formula framed around how much the employee elects to contribute. For example, a common company-match program is 50 cents for every dollar contributed by the employee, up to 6 percent of the total salary deferment.

401(k) plans can be funded by any combination of these three options, though it should be noted that employee contributions of any kind are not required.

Here are additional basics to understand regarding the funding of your 401(k):

Vesting – Many companies establish a vesting schedule that allows employees to gain entitlement to employer contributions as their tenure with the company lengthens. Employees are always 100 hundred percent vested in their own contributions however, as those funds originally belonged to them to begin with.

Contribution limits -Employees are in control of how much they contribute to their 401(k), so long as they stay within the annual contribution limits that are set by the IRS. In 2018, employees under the age of 50 may contribute up to $18,500.

Catch-up contributions – Employees over the age of 50 have the ability to make additional contributions up to a specific limit. In 2018, employees over the age of 50 may contribute up to an additional $6,000.

Investing Your Funds

Once a 401(k) plan has been established, employees may choose where to invest their funds from a list of investment options. Employees may opt for allocation of different percentages to different investments, devote all of their funds to one investment or choose to decline on investing their funds altogether. Investing funds from one’s 401(k) is not risk-free, but it does offer the possibility of portfolio growth.

Taking the Money Out

Funds in your 401(k) account may be available to you should you wish to access them before you retire. However, if you desire to make a withdrawal from your 401(k) prior to retirement and are not in a state of financial hardship, you may be subject to a 10 percent tax penalty in addition to the regular income tax that is due at the time of withdrawal. Because of the negative impact an additional 10 percent would have on your funds, it is widely recommended to avoid withdrawing from your 401(k) unless you believe it is absolutely necessary. It should be noted, however, that there are certain exceptions to the additional 10 percent tax penalty.

It may be possible to use money from your 401(k) before retirement without the 10 percent tax penalty if you need it for sudden disability costs, avoiding eviction or foreclosure, buying your first house, or the expenses of higher education. However, withdrawing from that fund means withdrawing from your future financial stability because you are extracting potential portfolio growth. One way to be sure that the funds you take out are eventually refunded back into your retirement plan is to take out a loan from your 401(k), if this feature is an option in your employer’s 401(k) plan.

Taking a loan from your 401(k) is a lot like most other loans; you have a set amount of time to pay it back, you will be penalized if you don’t pay it back on time (the additional 10 percent tax penalty that comes from making an early withdrawal), and you will owe interest on the loan that is similar to the market rate of other loans. Whether or not a 401(k) loan or another type of loan is a better option varies by each individual scenario, as there are pros and cons to each type of loan. For example, a benefit of borrowing from your 401(k) rather than a different loan is that the interest you pay goes to you, so the interest you pay actually helps fund your future financial stability rather than becoming money that you will never see again. On the other hand, borrowing from your 401(k) plan could significantly reduce the potential growth of your portfolio, as the funds that would normally be invested are no longer in the account.

What is a Roth 401(k)?

The primary difference between the traditional 401(k) discussed above and the Roth 401(k) is that the taxation on the plans is reversed. In other words, funds that are contributed to a traditional 401(k) are not taxed at the time of contribution, but the funds are taxed at the time of withdrawal. Contributions to a Roth 401(k), on the other hand, are taxed with each contribution, but not at the time they are withdrawn. Because each contribution to a Roth 401(k) is already taxed, Roth 401(k) plans are not subject to required minimum distributions (RMDs) like traditional 401(k) plans are. RMDs are annual withdrawals that a tax-deferred plan participant must make once they reach age 70 1⁄2.

If a company offers both a traditional 401(k) and a Roth 401(k), an employee may choose to use either or both of them. Companies that offer both Roth and traditional contributions allow employees to elect what percent of each type of contribution is funded to their retirement plan.

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Traditional IRA vs. Roth IRA

Read about the differences between the IRA and Roth IRA saving programs.

Building Your Nest Egg: Retirement Income Strategies

Building Your Nest Egg: Retirement Income Strategies

 You spend most of your adult life saving for retirement, but have you ever thought about what you’ll do once it’s time to actually tap into those savings? Retirement income has traditionally relied on a combination of Social Security, pensions and personal savings, such as 401(k) accounts, IRAs or other investment vehicles. Now that many workers believe social security and pensions will no longer be available in retirement, strategies for creating income must change as well.

Sources of Income

Social Security: According to a 2012 report by the Social Security Administration, the most used form of retirement income in 2010 was social security, with 86 percent of people over 65 receiving payments. This same study found that 65 percent of retirees depend on social security for over half of their income. If you believe social security will still be around when you retire, you can see that it could play a large role in your income plan. And if you don’t believe you can rely on it, you have a large percentage of income to make up for when you retire.

Pension plans: Like social security, pensions area form of retirement income that many workers are no longer depending on. Pensions and other defined benefit plans are waning in popularity among employers, and many companies have already phased them out. You may have a better chance at pension income if you work for the military or government, but for many future retirees, a pension will not be part of their retirement income plan either.

Savings: The final piece of your income plan is your personal savings and investments, perhaps the only piece many future retirees will depend on. Investment accounts, real estate, bonds, CDs, dividends, high-interest savings accounts and anything else that appreciates can provide income in your golden years.


Your income strategy may combine two or three of the aforementioned income sources, or you may be relying solely on your personal savings. To develop an effective strategy, you’ll need to estimate how long you’ll be in retirement (what year you’ll retire and your life expectancy), the value of your savings (how much you’ve saved, how much you can save before you retire and how much it is expected to appreciate) and how much you need to live on.

Safe withdrawal rate: The 4 percent rule was established as a one-size-fits-all safe withdrawal rate. To follow this rule, retirees take 4 percent of their entire portfolio’s value in the first year of retirement to use as living expenses. This amount is then what they’d use annually throughout their retirement, adjusting only for inflation. Four percent is considered a safe withdrawal rate because it is not likely to deplete your savings before the end of your life. Many factors render this rule ineffective: excessive inflation, lifestyle changes, unexpected expenses, long lifespan and more. Additionally, 4 percent might not be enough for you to live on, or it might force you to live more frugally than necessary. Nevertheless, it is a good rule of thumb to keep in mind. Another strategy is to tie your withdrawals to your portfolio’s value, increasing when the market is up, and decreasing when it is down. This works well in theory, but only if you can afford to live on a smaller distribution in a bear market.

Annuities: For guaranteed, regular income throughout your retirement, consider purchasing an annuity, which you can think of as a cross between an investment account and an insurance plan. You purchase an annuity through an insurance company (which may also be an investment company in the case of variable annuities) who then professionally invests your money and uses the growth to provide you with a fixed or variable income stream. You can choose between different types of annuities to find one that fits your needs best, including the following:

• Fixed annuity: The most conservative type of annuity, these pay the same amount of money regardless of how the market performs. You won’t have to worry about a down market, but you also won’t reap the benefit of an upswing.

• Variable annuity: On the contrary, a variable annuity varies its payout with market trends. Your income correlates with market fluctuations, which is riskier but also has the capacity for better returns.

• Equity-indexed annuity: An attempt to combine features of fixed and variable annuities, the equity-indexed annuity guarantees a minimum return, but fluctuates with an equity index to provide higher payments in a good market. Returns won’t be as high as actual market returns, but they can be better than a fixed annuity. Here, you have the possibility of high returns without the risk of losing everything.

Other strategies: You can additionally live on income from part-time retirement jobs, rental income on owned real estate, royalties from past work, laddered CDs, stock dividends and more.


There is always the risk of unexpected expenses (especially health care costs) and not saving enough for retirement. But even if you do everything you can to mitigate these risks, you cannot have an entirely risk-free retirement. One of the biggest risks facing retirees today and in the future is increasing life expectancy. Many retirees save for a 30-year retirement and end up outliving their savings. Another risk is market volatility. You could lose more of your retirement savings than you can afford to if the market takes a downturn. Keeping safe, low-risk investments might seem like a good idea, but this actually puts you at risk of losing money to inflation. Inflation is another risk that is a real issue for those on a fixed income.

Income in retirement is never a sure thing. With possible social security decreases, the elimination of pension plans, a volatile economy and increasing health care costs, there is no way to guarantee a certain amount of income in retirement. The best way to approach the retirement income quandary is to create a realistic strategy that accounts for as much risk as possible while ensuring a comfortable lifestyle throughout your retirement.

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Qualified Retirement Accounts Chart

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