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Betsy Wise
By: betsy_wise
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Plan Your Retirement as a Small Business Owner with a Roth IRA

Building a retirement portfolio is similar to constructing Lincoln Logs. Youngsters can’t complete a log home or fort unless they build the project from the ground up. By making regular contributions to a Roth IRA retirement account, you can build a comfortable nest egg to live on when you retire which includes investment earnings.   

The hardest part when planning your retirement may be using the money for savings you currently allocate to grow your business. If you’re on the fence about this decision, Peter Lynch, a successful American investor, offers sound advice: 

In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.

By reading this post, you’ll understand how a Roth IRA works, whether you need one, and how to open a retirement account. 

What is a Roth IRA?

Named after William Roth, a former Delaware Senator, a Roth IRA (Individual Retirement Account) allows owners to put away money that’s already been taxed. When you make contributions to the retirement account, you can invest in funds, stock, bonds, and other types of savings products.

When you start making withdrawals at age 59 ½, what you withdraw and any earnings are tax-free as long as you meet certain requirements mentioned below. 

How does a Roth IRA work?

When you earn income from employment, you can make contributions to a Roth IRA. You aren’t required to be a certain age to do so. Likewise, you can make contributions as long as your income doesn’t exceed certain income limits. Investment guidelines establish a maximum amount you can contribute within any given year.

As of 2019, you can put up to $6,000 in a Roth IRA account ($7,000 if you are age 50 or older). You can make these maximum contributions as long as your modified adjusted gross income (MAGI) level meets requirements based on your tax filing status. 

Currently, the limit for the single and single head of household filing statuses is $122,000 and $193,000 for married filing jointly. You can make partial contributions for higher MAGI income levels between $137,000 and $203,000. However, if your income level is higher than any of these amounts, you cannot contribute to a Roth IRA.  

Should you have any questions before making a withdrawal, you should contact a financial advisor first.

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When you’re ready to withdraw Roth IRA funds, you have several options.

  • Age 59 ½ or older

You can make tax-free withdrawals when you’ve owned the account for 5 years (referred to as the “5-year rule”).

  • Under 59 ½ and you meet the 5-year rule

Your withdrawal earnings are subject to taxes and penalties. You may be excluded from taxes and penalties when using the money to purchase a home for the first time ($10,000 lifetime limit), having a disability, or at the event of your death. 

  • When you don’t meet the 5- year rule

If you’re age 59 ½, your withdrawal is taxed but not penalized. If your age is less than 59 ½, earning withdrawals are taxed and penalized. It may be possible to avoid penalties (but not taxes) based on the same uses for money as noted above when you meet the 5-year rule. Two other ways to use the money to avoid incurring penalties are paying for qualified education expenses and unreimbursed medical expenses.  

Do I need a Roth IRA?

That’s a question every small business owner asks themselves. 

Remember the Lincoln Logs mentioned earlier? Construction kits include walls, roofs, chimneys, windows, doors, and other parts. When considering whether to open a Roth IRA account, think of the retirement investment account as one of the building blocks to reach financial security.

As already detailed, there are tax advantages when opening a Roth IRA. 

Investments grow without being taxed as long as the account owner meets the age, income requirements, and the 5-year rule when making withdrawals. Likewise, since there’s no age limit for contributing, you can keep adding funds to your account after you retire. 

When your children have summer jobs or work throughout the school year that they can put money into a Roth IRA. By doing so, they learn the importance of saving and investing.

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Here’s another benefit. Owners aren’t required to make minimum withdrawals after reaching age 70 1/2 as you do when owning a 401K or a traditional IRA. This gives you more flexibility and control over when and how much money you use. 

If you don’t make withdrawals, the money keeps growing tax-free.

Step-by-step instructions on how to open a Roth IRA

Setting up an account is easy. It’s important to know what types of investments earn the most without being too risky. If you’re unsure what to do, you could consult with a financial advisor before opening the account.

1. Decide where to open the account

Personnel at investment companies and banks can help you open the account. For your convenience, select a location that’s close to your business or home. Shop around and ask questions. Are there fees to open the account, maintain it, or to move money around when switching to a different type of investment?

2. Complete the paperwork

You’ll need a driver’s license or another type of photo ID, social security number or ITIN, and a checking or savings account number. You’ll also need the name and phone number of your beneficiary (the person you want to receive the savings at your death). You will be asked to fill out the IRS form 5305-R.

3. Choose your investments

Banks and brokerage firm personnel can advise where to invest your money based on market volatility, risk, and stability. However, it’s important to do your homework because it’s your money. You can keep a mix of investments to diversify your retirement savings account or have one type of investment.

4. Set up regular contributions

When you’re serious about saving, it’s a good idea to transfer money from your bank account to the Roth IRA each month. Of course, you need to select an amount that’s comfortable for your budget so you don’t create a cash flow problem.

After you set up the account, you should make sure that the investments you chose are performing well in the market. You can make adjustments to balance out your retirement account by switching to more profitable investments on a quarterly or annual basis.

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We’re here to help

Your goal when planning your retirement is to put away money for the future.  Our goal is to help you know how to do that. That’s because we believe in our motto, “No Business Left Behind.” Consider us as the go-to financial institution you can depend on.

We invite you to become a part of our financial community by subscribing to the Camino Financial Newsletter. It arrives weekly in your inbox and includes tips relating to funding, management, technology and other topics on how to grow your business. 

If you want to keep contributing to your Roth IRA but you want to invest some cash in your small business, the best solution could be a loan. We can help you. Our staff is ready to assist you and answer any questions you may have.

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