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Articles by Britt Gillette

About Britt Gillette

Britt Gillette runs the top Roth IRA resource on the web, Your Roth IRA. Britt, along with his wife Jen have two children (Samantha and Tommy), and are passionate about helping people make wise financial planning decisions.

3 Roth IRA Rules Benefitting Military Personnel

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If you serve in the military, you have the option to take advantage of early retirement. Service of 20 years or more makes you eligible to retire with a pension of 50% or more of your military pay.

Unfortunately, 50% of military pay most likely isn't going to yield enough money to retire and live the high life. But it does get you a step closer to your retirement goal. If you're wise, you'll supplement your military pension with various forms of investment income, such as income from a rental property and cash flow from your retirement savings.

For members of the military, a number of options exist for socking away extra cash for retirement, and one of your best options is your Roth IRA.

A Roth IRA has always been a good option for your retirement savings, but with passage of The Heroes Earned Retirement Opportunities Act (The HERO Act), your Roth IRA now comes with additional benefits. Below are three Roth IRA provisions which uniquely benefit military personnel:

Roth IRA for Military Members

1) Non-Taxable Combat Pay Contributions

Only certain types of income are eligible as the basis for making a Roth IRA contribution. As a general rule, if you don't have taxable earned income, you can NOT make a Roth IRA contribution.

For years, this restriction on Roth IRA contributions prohibited military personnel from contributing income earned in a tax-free combat zone. But recent changes to the law now allow military members with non-taxable combat pay to use those same funds as the basis for making a Roth IRA contribution.

As a result, it's now possible for those receiving non-taxable combat pay to avoid paying taxes on their money forever.

For example, suppose you're 30 years old, and you received non-taxable combat pay this year. You received that money tax-free. If you contribute it to your Roth IRA, it grows tax-free until the day you take it out. As long as you wait to reach age 59 ½ and you meet the requirements of the Roth IRA 5 year rule, you can then withdraw those funds tax-free as well – meaning you'll never have to pay taxes on those funds!

2) Penalty-Free Qualified Reservist Distributions

If you're a qualified reservist, you can withdraw funds from your Roth IRA early without having to pay the 10% early withdrawal penalty.

So who constitutes a qualified reservist? Any reservist ordered or called to active duty after September 11, 2001 who serves in any one of the following:

  • Army National Guard
  • Army Reserve
  • Naval Reserve
  • Marine Corps Reserve
  • Air National Guard
  • Air Force Reserve
  • Coast Guard Reserve
  • Reserve Corps of the Public Health Service

While you can always withdraw your original Roth IRA contributions tax-free and penalty-free at any time and under any circumstance, if you withdraw earnings (capital gains, interest, dividends, etc.) from your Roth IRA prior to reaching age 59 ½ and meeting the requirements of the 5 year rule, you'll likely owe income taxes and a 10% early withdrawal penalty on those withdrawn earnings.

But qualified reservists are exempt from the 10% early withdrawal penalty, meaning they can make early withdrawals of Roth IRA earnings and only be subject to income taxes.

3) Servicemembers' Group Life Insurance (SGLI) Contributions/Rollovers

If you or one of your family members receive a military death gratuity or a Servicemembers' Group Life Insurance (SGLI) payment resulting from a death or injury, you can rollover all or part of the amount you receive into your Roth IRA.

The rollover must occur before the end of the one-year period beginning on the date you received the payment, and the amount of money from your rollover can not exceed the total amount of money you received from the death gratuity or SGLI payment reduced by any amount you contributed to a Coverdell Education Savings Account (ESA) or another Roth IRA.

As an added bonus, any military death gratuity or SGLI payment you contribute to your Roth IRA is disregarded for purposes of the 1-year waiting period restriction on Roth IRA rollovers, so if you have an old 401k or Traditional IRA you want to rollover, you don't have to wait a year before doing so.

Conclusion

A Roth IRA is a powerful investment vehicle for building up your retirement savings. For members of the U.S. military, additional provisions within the law allow you to derive extra benefits from investing in your Roth IRA.

While a defined benefit military pension is a nice reward for your years of service, you don't want to be completely reliant on it during your retirement years. Diversification is good advice, and your Roth IRA is a great place to start.

This is a guest post from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.

Can You Open More Than One Roth IRA?

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Can you open more than one Roth IRA?

This is a good question to ask, because some people seem to be confused when it comes to this issue.

Despite the conventional wisdom, and regardless of what some people may tell you, you can only have one Roth IRA.

Some why do some people believe they have multiple Roth IRAs? The confusion stems from knowing the difference between your Roth IRA account and your Roth IRA custodian or trustee.

Roth IRA - How Many Can You Have?

Roth IRA Trustees and Custodians

Under federal law, you're required to have a “trustee” or a “custodian” to host or maintain your Roth IRA.

So what constitutes a “trustee” or “custodian”? As a general rule, a trustee or custodian is a federally insured:

  • Bank
  • Credit Union
  • Savings & Loan
  • Brokerage House, or
  • Other Financial Institution

For example, if you go your local bank, open a Roth IRA, and deposit $5,000 as your annual contribution, your bank is your Roth IRA custodian.

Multiple Trustees and Custodians, But Only One Roth IRA

Under the Roth IRA investment rules, you can have multiple Roth IRA trustees or custodians. But in the eyes of the IRS, you can only have one Roth IRA.

Does that make sense? For instance, you might have $5,000 in a Roth IRA account at Charles Schwab and $10,000 in a Roth IRA account at First Trade Securities. In this case, you have two Roth IRA custodians, but only one $15,000 Roth IRA as far as the IRS is concerned.

One Roth IRA Per Person

In plain terms, you can have one Roth IRA per person, or better stated…

1 Person = 1 Roth IRA

That said, you can have multiple Roth IRAs as a married couple. A married couple can have two Roth IRAs – one in each spouse's name.

But the same rules apply. Even if as married couple you have 12 Roth IRA accounts scattered among 12 different financial institutions, in the eyes of the IRS, you only have two Roth IRAs – all the accounts in your name and all the accounts in your spouse's name.

Know The Difference

Knowing to differentiate between your Roth IRA itself and your Roth IRA custodian may sound like mere semantics, but at certain times, it can prove critical.

For instance, in order to claim Roth IRA losses on your tax return, the IRS you to first close your Roth IRA – meaning you must close all of your custodial accounts. You can't claim a loss on a single custodial account in isolation. The IRS only lets you claim a loss on the sum total of your custodial accounts, which it views as your one and only Roth IRA.

Likewise, when it comes to withdraws from your Roth IRA, whether or not you have to pay taxes and/or penalties is a question subject to specific ordering rules, and those rules apply to all of your custodial accounts as a whole. Not knowing the difference can get you in trouble!

For example, under the IRS ordering rules, Roth IRA withdrawals must be made in the following order:

1) Original Contributions
2) Conversion or Rollover Contributions, and
3) Investment Earnings

Let's say you're 62 years-old and you want to withdraw funds from your Roth IRA. You have two Roth IRA accounts, one with eTrade worth $100,000 ($30,000 in original contributions and $70,000 in earnings) and a second account with Wells Fargo worth $20,000 (a recent conversion).

If you withdraw $50,000 from your eTrade account, the first $30,000 is tax-free and penalty-free because you're simply withdrawing your original contributions. The remaining $20,000 represents investment earnings, and since you're over age 59 ½, you can withdraw those funds tax-free and penalty-free as well – right?

Not necessarily. Under the ordering rules, the remaining $20,000 you withdrew does not represent investment earnings, but conversion contributions. And each conversion you perform is independently subject to the Roth IRA 5 year rule. So if you haven't yet met the requirements of the 5 year rule, then it's possible you owe a 10% penalty on that $20,000 you just withdrew.

$2,000 is an expensive price to pay for not knowing and understanding the Roth IRA withdrawal rules. So make sure you understand the difference between your Roth IRA as it relates to the IRS and your Roth IRA custodian(s)!

This is a guest post from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.

A Traditional IRA Or A Roth IRA: Which Is Best?

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Which is best – a Traditional IRA or a Roth IRA?

That's a great question, and there's no cookie cutter answer which is applicable to everyone. Each person's financial situation is different, and different needs call for different solutions.

And while you don't necessarily have to choose one over the other (you can invest in both a Traditional IRA and a Roth IRA), keep in mind that your annual IRA contribution limit applies to both retirement accounts, so a contribution to one means less money you can potentially contribute to the other.

For example, if your annual IRA contribution limit is $5,000, you can NOT contribute $5,000 to your Traditional IRA and $5,000 to your Roth IRA. If you contribute $5,000 to one, you can't contribute any amount to the other. And if you contribute $3,000 to one, the most you can contribute to the other is $2,000. So you have a big decision to make when it comes to allocation of your retirement savings.

Below are just a few of the factors you need to take into account when trying to decide whether you should invest your hard earned money in your Traditional IRA, your Roth IRA, or some combination of both.

Roth IRA Vs Traditional IRA

Tax Deductibility

One of the primary factors to consider when evaluating the benefits of your Traditional IRA vs. your Roth IRA is tax deductibility.

Generally speaking, contributions to your Traditional IRA are tax deductible – meaing you make your contribution with pre-tax dollars, which lowers your taxable income, and then you pay your taxes. On the other hand, contributions to your Roth IRA are non-deductible – meaning you pay taxes on your gross income first, and then make your contribution with after-tax dollars.

Which is best? It really depends on a number of factors unique to your own financial situation, but as a general rule, if you're in a high tax bracket now and you anticipate being in a lower tax bracket when you retire, you might want to take advantage of the tax deductibility of your Traditional IRA. But if your tax bracket is lower now than you expect it to be in retirement (or you think it will stay the same), then you might want to take advantage of the tax-free withdrawals offered by your Roth IRA.

Taxes Upon Withdrawal

Another factor to consider is how your money is taxed when you finally make withdrawals during retirement.

With your Traditional IRA, you owe income taxes on any funds you withdraw during retirement (since you originally made tax deductible contributions), but under the Roth IRA rules, all qualified withdrawals are tax-free when you retire (since you originally made non-deductible contributions).

Which is best? Obviously, we all prefer tax-free withdrawals from our retirement savings, but again, you can't look at these two factors in isolation. You need to weigh each option relative to the type of contributions you make (deductible vs. non-deductible). In most cases, it's a wash. You either pay the taxes upfront (non-deductible Roth IRA contributions) or you pay them later (taxable Traditional IRA withdrawals).

However, keep in mind that if you're capable maxing out both accounts, you end up with more money in retirement if you choose your Roth IRA. Why? Because you're able to contribute more.

For instance, let's say you contribute $5,000 to your Roth IRA and your spouse contributes $5,000 to a Traditional IRA. You invest both accounts in identicle assets so that when you reach age 60 both accounts are worth $200,000. If you're in the 15% tax bracket, your Roth IRA is still worth $200,000, but your spouse's Traditional IRA is only worth $170,000 because any withdrawals are subject to income tax.

Required Distributions

One last factor you need to consider is required distributions.

By law, you must begin taking annual distributions from your Traditional IRA at age 70 ½ whether or not you want to. But with your Roth IRA, you don't have to worry about required distributions. If you so choose, you can continue investing in your Roth IRA until the day you die, regardless of how long you live.

In this respect, your Roth IRA is a superior option because it gives you more flexibility. You choose whether or not to withdraw funds from your retirement savings, and no arbitrary rules dictate a forced withdrawal. This gives you greater freedom to plan your finances during your retirement years. After all, not every 71 year old needs to withdraw funds from a retirement account. Many are still working, and among those who are retired, many can live comfortably off of social security benefits, pension income, and other investments. So why paint yourself into a corner?

Which Is Best?

Aside from the required distribution provision which forces you to withdraw funds from your Traditional IRA, you can't make a blanket statement applicable to everyone regarding which is the better option – a Traditional IRA or a Roth IRA.

Only you can decide which one is your best option, and you do so by examining your individual financial situation, assessing your current and projected tax brackets, using a Traditional IRA vs. Roth IRA calculator, and/or taking into account any additional forms of income you may have in retirement.

In the end, you may find one is a clear winner over the other, or you may decide to hedge your bets and split your annual IRA contribution between the two accounts.

This is a guest post from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.