Non-Qualified (Non 401k) Plans


Roth IRA’s stand out as being a strong strategy for tax diversification. They certainly are. With a Roth IRA, you can contribute after tax dollars to enjoy growth and withdraw tax-free. Also, you can contribute to them well into your retirement years unlike a 401(k). But, although Roth IRAs allow you to pay taxes up front and enjoy a tax-free income later in life, they carry limitations and even penalties. Whether you employ them as part of your financial strategy will come down to a number of variables: Do you plan to use the Roth for a great accumulation? Can you use it as a strategy in savings where you can access liquid cash? What limits does a Roth carry? Can it be passed on to a beneficiary? All of these questions and everything in between should be considered. So, as you begin your inquiry, here are just a few things to consider about Roth IRA’s.


Contribution Limits

You are able to put $6,500 a year into a Roth IRA. Once you reach age 50, you can add another $1,000 ($7,500) to that contribution limit for a catch-up contribution. The 2023 Roth IRA contribution salary limit is $153,000 for single filers and $228,000 for married couples filing jointly. But if your earned income is $130,000 a year and you are single, you are going to want to save more than $6,500 or $7,500 a year. Money can only grow as aggressively as the dollar amount that it’s growing from. When we consider this, a Roth may well serve you better as a supplemental and/or long-term savings plan for saving and retirement rather than a primary vehicle for either.

Other Limits & Penalties

Because there’s no tax deduction for Roth contributions, you can retrieve that money at any time free of taxes and penalties, regardless of age. However, to enjoy this benefit you must have had one Roth IRA open for at least 5 years. The other limitation is that you must be at least 59 ½ or older. If you are under 59 ½, your withdrawal will get hit with a 10% early-withdrawal penalty.

*There are, however, a few exceptions to this rule: if you become disabled; you have hardship expenses; or if you pass away and the money goes to your beneficiary. Also, if you need money for a first-time home purchase, you can take up to $10,000 out of your Roth.*

Excess IRA Contributions

An excess contribution occurs when you’ve contributed to a Roth and made too much to qualify or if you contributed more than you’re allowed to either IRA. This is punishable by a 6% tax penalty. As is stated, these excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. This tax cannot be more than 6% of all your IRAs as of the end of the tax year. 

There is one more set back to Roth IRA’s – market risk. There have been several market downturns over the last 20 years and 3 of them have been major –averaging about 50% each. With such a high risk (market risk) and low reward (low contribution limit), Roth IRAs need to be positioned carefully as part of financial planning.