Quick Roth IRA Tip!
Daniel P. Johnson, CFP®, EA
Helping high-stress physicians enjoy life while their health, wealth, and time are at their peaks.
Another short one this week. I am trying to follow what my physician clients tell me – I barely have the time to read the stuff I need to read, so keep your stuff short😊
This is just a quick tip if you are considering doing any kind of Roth Conversions, whether now or down the road.
Open a Roth IRA this year and just stick a small amount in there. Maybe $500.
That’s it.
The reason is because of a key rule with Roth IRAs. Which we will dive into in a second. First, I want to mention the scenario this may apply to.
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Let’s say you are gearing up for retirement in the next 2-3 years and want to convert some of your Tax-Deferred (401ks) balances to Roth Accounts (Never-To-Be-Taxed-Again). Makes total sense to pay a lower tax bill now before tax rates change in 2026 with the expiration of the current tax structure, known as TCJA (Tax Cuts and Jobs Act). If you plan on accessing those converted Roth dollars your first few years of retirement, well, you could have a nice surprise from Uncle Sam and the IRS.
The reason is because there is a five-year clock with Roths. The rule simply says you must have a Roth in place for five years in order to take out funds without paying taxes, assuming you meet the other rules such as being 59 ½, which is what I am focused on with this example of someone retiring.
A few more specific notes. The five-year clock begins the start of the tax year in which you first fund the Roth. Next, you can always take out contributions without penalty or taxes. However, if you do not meet the holding and age (59 ½) rules, you may be looking at taxes on the growth and also a 10% penalty.
Again, very simple example and high-level tips here. Be sure to talk to your CFP and/or CPA about this.
My point is if you are considering doing any sort of Roth Conversion this may be a reason to open a Roth IRA with a few bucks just to get the clock started. It could save you some headaches down the road. And hopefully the worst result is you have a small pot of money that will never be taxed again.