The general feeling on the Roth IRA is that the money grows tax free. When you are ready to withdraw the money, you do so without paying taxes. While this is true in a number of cases, the reality is far less cut and dry. There are times when you will pay taxes on your Roth IRA withdrawal, and it’s important to understand when those times are.

Because there are a number of interesting benefits related to the Roth IRA, it is little surprise that there are also a few rules that you need to observe in order to avoid taxes. Here are some instances when you will pay taxes on your Roth IRA withdrawal:

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One of the best things you can do for your future is to use a tax-advantaged retirement account to save for the future. Your retirement plan can put you ahead in your finances, and ensure that you have the money you need for a comfortable retirement. And if you plan your retirement really well, you can put off needing to withdraw funds for a good long time.

However, with most retirement accounts, the requires you to start withdrawing money from your account — even if you don’t need it. The money that you are forced to take from your retirement account is known as a Required Minimum Distribution (RMD). While you don’t have to take RMDs when you have a Roth IRA, you do have to take them from Traditional IRA and other non-Roth IRA accounts, as well as from all 401(k) and 403(b) accounts.

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Most people know that a Roth IRA is a great retirement investment if your income is below $110,000 if filing as a single person or if you and your spouse’s income is below $173,000 if married and filing jointly. What makes the Roth so attractive is that since you’re putting in after tax dollars, you can withdraw the money tax free in your retirement. But did you know there are several other perks to the Roth IRA and other ways you can use the money besides for your retirement?

Of course, you should be careful about withdrawing money from your Roth IRA before your retirement years, but in some cases, deciding to withdraw some of the money early may be a prudent decision. (The caveat is that you must have held your Roth IRA for 5 years, and you’re only allowed to withdraw the money you invested, not the interest you earned, to withdraw it penalty free.)

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My great uncle Andy was a volunteer for Meals on Wheels, delivering meals to seniors several times a week. He began volunteering after his own retirement and continued until he was in his mid-90s! He was in an excellent health and did not pass away until he was 99. He simply went to sleep one night and didn’t wake up.

While we might all wish for such a long, fulfilling life and such a peaceful death, the unfortunate fact is that my great uncle Andy’s fate is not the way most of us or our older relatives will see our lives end. Many of us have aging parents and grandparents, and while having financial discussions with them is hard enough, perhaps even harder is discussing how they would like their end of life experience to be. “Sixty percent of people say that making sure their family is not burdened by tough decisions is ‘extremely important’”, but “56% have not communicated their end of life wishes” (The Conversation Project).

The Conversation Project was developed to help make having this type of discussion easier and to bring attention to the need to have this talk.
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Over the last few years, I’ve received many emails asking for my opinion on investing or personal finance newsletters. When it comes to investment related newsletters, the argument against them is this. In order for a investment newsletter to be “good,” it has to rise to the top of the stack in terms of returns. To do this, it has to take risks because riskier investments produce the highest returns.

If an investment newsletter does well, which means its risks have paid off, then it gets touted as one of the “best.” The likelihood of an investment newsletter being the best each year is slim, so one year’s best is potentially the next year’s dog as gambles don’t pan out. (if you’re going to sign up for one, pick one with a long track record of good performance)

That’s why I’m looking for a good “retirement” newsletter. I think retirement newsletters focus on more than just picking stocks, they focus on how to approach your retirement as a whole and make smart decisions. They may offer up what stock to pick, with buy/sell signals and expected returns, but that shouldn’t be the goal. The goal should be to get your noodle working on what the best approach is.
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Target date retirement funds, also called lifestyle funds or simply target funds, are mutual funds that automatically adjust their own asset allocation with a target retirement date in mind. As the years pass, the fund moves from a more aggressive, equity heavy mix to one that is less aggressive and may include more income generation and “safer” investments.

Glide path refers to how that mix of investments intends to change as the years pass. Imagine a chart in which you graphed the asset allocation over time (% in stocks, for example) and you have an idea of what the “glide path” of a fund will be. A steeper glide path means that the fund becomes more conservative faster than one with a shallow glide path. A few years ago, I compared the different asset allocations of target funds for several fund companies and it was obvious that not all funds were equal. IN that example, Fidelity was more aggressive, starting with a higher allocation in stocks and ended with a higher allocation in stocks when compared to TIAA-CREF, Vanguard, and T. Rowe. (These numbers are several years old now and we didn’t get a fund’s specific glide path, we simply used the target years as a proxy for the glide… so this may have changed since then)

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Most of us tend to put our retirement plans on automatic. It’s much easier to just have the money automatically taken out of your paycheck, and have it put into your 401k (hopefully with a match).

Just leaving your 401k on auto-pilot, though, can be problematic in the long term. While you don’t want to completely change your investing strategy without serious thought, you should assess your portfolio regularly to make sure things are on track for a successful retirement. Sometimes you need to tweak things a little bit.

Here are 5 mid-year tuneups for your 401k:
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In a post about reading your Social Security statement a few weeks ago, reader J. Shoe asked the following question:

Just trying to find out if it is true that any Soc. Sec. benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and their a link to see this horrific scam. It’s bad enough they borrow from SS without the intention of paying it back, but this crazy

I don’t see how it’s crazy but I also didn’t fully understand how Social Security benefits are taxed. For more information, I turned to Pub 915: Social Security and Equivalent Railroad Retirement Benefits, which is the IRS document that explains everything.

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