So, It’s Nearly 2023; What Now? (Part 2)

Categories : Financial, News
December 28, 2022

Last week, we discussed the value of accepting Personal Responsibility for our own financial futures, including starting and/or contributing to an Individual Retirement Account, or IRA. Our primary focus was on potential 2022 tax savings. Our suggestion was to open (or contribute to) a Traditional IRA, in which all contributions are deductible for qualified Account Owners. 2022 contributions can be made up to Tax Filing Day in 2023, but the benefit will still be reaped for 2022.

Today, we shift our focus to the Roth IRA, which does not provide current income tax relief, but provides other worthwhile benefits later, when withdrawals made by Account Owners will be tax-exempt. Despite not having to open a 2022 account and contribute until early next year, there may be a good reason for new investors to open an account in the remaining few days of 2022.

Maximum benefits from a Roth IRA are not realized until the account has been open for 5 years, and until the Account Owner reaches age 59-1/2, at which point withdrawing earnings becomes tax-free. Before the 5-year period is satisfied, contributions may be withdrawn at any age with no tax due, but prematurely withdrawing earnings may require income tax and/or a 10% tax penalty, depending on age.

The full 2022 credit is a result of how the 5-year holding period is calculated. A Roth IRA opened before the end of the year will have satisfied Year 1 at midnight, December 31, 2022. Year 2 starts on January 1, 2023, and satisfies the entire second year of the requirement. This means that on January 1, 2026, the 5-year holding period is considered complete.

Anyone desiring to open a Roth IRA and satisfy the 5-year qualification period can still open an account with a small initial deposit before this year-end. Most custodians will allow a new account to be opened online, or by appointment in a local office. Some banks and credit unions can open a Roth IRA in person, and a deposit can be made, so long as a minimum opening deposit is made.

Another strong argument for starting a Roth IRA lies in the generous rules for making future withdrawals for education, home purchase, etc. Rules can be found on the website, or on the website of the custodian you choose to hold the account.

With few exceptions, opening a Roth IRA before year-end will provide benefits to the owner of the account. If you qualify, why not take this opportunity to establish another block in your retirement income foundation? Do it now, and you may be able to receive full benefits sooner, rather than later.

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