Bear Mountain Capital Inc.

The 101 Year Old Skier With a Roth IRA

| March 27, 2013

Planning Perspectives

Ever met anyone over the age of 100?  Do you plan to live past 100?  Most of my life I would have answered no to both of these questions, but more and more as I meet or hear of people living to a ripe old age, I figure what the heck- I guess I will shoot for 101.  So, what next?   I better plan for my money to last.  This thought process brought me to think about one of the unique and important features of the Roth IRA that is not always the frontrunner in the list of benefits.  The stand out feature identified by many is that contributions to a Roth account are made with after tax dollars and for that reason, one does not have to share the egg with Uncle Sam upon withdrawal.  In other words, taxes have already been paid at the time of contribution so qualified withdrawals are tax free.  This is a nice feature for younger investors who are currently in low tax brackets and plan to increase their wealth over time. 

In a traditional IRA, they would have to pay taxes on the money earned at the time of withdrawal.  The tax rate applied to these withdrawals may or may not be higher or lower than their current tax rate, depending on how much wealth they have accumulated over time and how the tax laws have changed over time.  There are several factors that could tip the scale one way or the other as to which type of IRA will net the investor the most benefits, but let’s talk withdrawals…

We have identified briefly the potential tax benefit of a Roth IRA for certain investors.  Now let’s assume, like me, an investor plans to still be able to ski, or at least fish, in his or her 80s and 90s and likes working so much that fully retiring is just not appealing.  Or maybe one simply has to work to pay for the ski trips.  Or maybe, one is retired, but has no need for the additional funds stashed in his or her IRA.  An important feature to the Roth IRA is what happens after the IRA holder reaches the age of 70 ½. 

In a traditional IRA two things happen within the year following age 70 ½.  First, the ability to make contributions “goes away” and second, there are required minimum withdrawals.  Since I have outlined my plan to continue to work and play when I’m 71, 81 and even 91, the two characteristics of the traditional IRA above could prove to be a greater financial burden to my financial plan.  The reason is I may be required to take withdrawals when I don’t necessarily need them and my ability to continue saving via an IRA may be limited.  The Roth IRA however can potentially  allow me to continue to make contributions (if my income level doesn’t exceed a certain threshold) and I will not be forced to begin withdrawing the funds until I need them… like after several trips to heli-skiing lodges in Alaska.

People continue to live longer and longer and our life expectancy only increases with modern medical advancements.  So even if an investor does not end up being a ski/fish/work-a-holic like me, the amount of time after reaching age 70 ½ that funds may not be needed could be substantial.  Therefore, not being forced to take withdrawals during those earlier years after reaching 70 1/2 could be a considerable benefit.

Is the Roth IRA the end all solution for retirement planning through age 101?  Of course not, but its features are indeed something to consider when developing your financial plan.  Below are some other the key characteristics of a Roth IRA:

  • Contributions are not tax deductible
  • Distributions are tax free if taken after age 59 ½ and a Roth account has been open for at least 5 years
  • Maximum (current) contribution is $5,500 per year ($6,500 if you’re age 50 or older as of 2013).  Or you can contribute more than the maximum and pay an excess IRA contribution tax of 6% on the excess amount
  • Can contribute the full amount as long as Adjusted Gross Income (AGI) is under  $110,000 for an individual and $173,000 for a couple who file taxes jointly.
  • Can contribute whether or not you participate in an employer retirement plan
  • Distributions are not required to begin at age 70 ½
  • No 10% early distribution penalty for death, disability, and first-time home purchase

How do you plan to live in retirement?