Q My wife and I would like to start an IRA for
ourselves and for our future child. Where would
you recommend starting and what should we stay
—A.J., La Habra, California
A I love that you are thinking about your child who
is yet to be born. ;at’s what I call ;nancial planning! But in all honesty, what I want you to focus on
;rst and foremost is your retirement planning. One
of the greatest gi;s parents can give their children is
the peace of mind that the parents won’t need ;nancial assistance later on. Saving for your retirement
sooner rather than later is how you can build the
;nancial security that your yet-to-be born children
will one day be so grateful for.
You mentioned an individual retirement
account (IRA). ;at’s a great option. But ;rst I just
want to make sure that if either you or your wife has
a retirement plan at work that o;ers an employer
matching contribution, you make those accounts
your ;rst saving priority. You always want to contribute enough to a workplace plan to earn the
maximum match from your employer.
If the employer plan o;ers a Roth option, I recommend you use that over the traditional option.
;e big payo; will come in retirement: 100 percent
of the money withdrawn from a Roth 401(k) will be
tax-free. Withdrawals from a Traditional account are
taxed as ordinary income tax.
;en, your next smart move is to fund your
own IRAs. If you and your wife ;le a joint tax return
with modi;ed joint income below $183,000 this
year, you both are allowed to invest $5,500 in a Roth
IRA. Singles with modi;ed adjusted income below
$117,000 also can invest that much. (Anyone at least
50 years old can save $6,500 this year.)
A Roth is better than a traditional IRA, in my
opinion. Your contributions can always be withdrawn without penalty or tax for an emergency. And
follow a few simple rules and any withdrawals you
make in retirement contributions and earnings will
be 100 percent tax-free. ;at’s quite an advantage
over withdrawals from a traditional IRA, where you
owe income tax on the entire amount you take out.
You can open Roth IRAs at any discount brokerage and then invest your money in low-cost
mutual funds or exchange-traded funds. All funds
and exchange-traded funds (ETFs) charge a fee,
called the annual expense ratio. The lower the
expense ratio, the more of your money stays invested
;e great news is that there are now funds and
ETFs that charge just 0.20 percent or less. ;at saves
you a ton over funds that charge 1 percent or more.
If you want to invest in ETFs, just choose a brokerage
that allows you to buy inexpensive ETFs without a
If you focus on saving in your employer plan and
your own IRAs you are going to be in great shape.
Q My husband will turn 69 this week and I am 68.
We’ve done well enough ;nancially that we have
delayed our Social Security payout until we turn
70. ;e problem is what do we do now to make our
tax burden less painful when we turn 70. 5?;
I have a tax-sheltered annuity I started in 1976
and stopped paying into in 1978. It is now worth
$20,000-plus. I have a modest pension. My hus-
band’s pension will be cut in half sometime this
year. We also have savings bonds expiring a;er 30
years. ;at’ll be lots of taxable interest too.
Should we roll our traditional IRAs into Roth
IRAs in case the market tanks again? Should we
combine our 403(b) and 401(k) into our traditional IRAs? Buy savings bonds?
—R.C., Birmingham, Michigan
A ;ose are a lot of questions, and you’ve le; out
some important details. For example, I am not clear
how much you have in those savings bonds. But
let’s just focus on a few important factors.
As you note, your pension is “modest” and your
husband’s payout is going to be reduced. ;at makes
me think your income will not place you in a high
tax bracket. For most retirees, their annual income
is less than their earnings when they were working.
;at o;en translates into having your tax burden
fall, not rise.
Your job is to not make your tax bill any worse.
And that’s what can happen if you convert all your
traditional IRAs to a Roth IRA in one fell swoop.
;e money you convert is taxed as ordinary income
in the year you make the move. ;at can indeed
send you into a much higher tax bracket.
Your best move is to hire a trusted tax adviser to
run the numbers for you. A good tax pro will be able
to help you consider converting amounts in any
single year that would not bump you into a higher
tax bracket. (You aren’t required to convert all of a
traditional in one move. You can do partial conversions over many years.)
I think the one move you are smart to make is
to consolidate all your accounts. You can move
your employer-provided retirement plans to a brokerage where you also have your traditional IRAs.
Bringing your various income sources under one
mega-account will make managing your accounts
all the easier.
And keep in mind that savings bonds will only
a;ect your taxes in the year you cash them in. ;ey
aren’t going to be an ongoing issue. C
Suze Orman is an Emmy
Award–winning TV host,
New York Times best-selling
author and motivational
speaker. She can be contacted
Orman will answer selected
questions in this column.
She regrets that unpublished
questions cannot be
Please include “Suze Orman
Q&A” in the subject line.
Q&A with Suze Orman
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