How financial advisors can help clients get the most out of Roth IRAs

How advisors can help clients get the most out of Roth IRAs

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Saving for retirement is a financial goal shared by most, even those at the beginning of their careers for whom retirement is close to a lifetime away. Understanding saving options and staying updated on policy changes that impact retirement saving are important for both financial advisors and their clients to ensure they are getting the most out of their money.

A common tool advisors use is the Roth IRA, but ensuring clients understand how this tool functions is key. Traditional IRAs are funded with pretax dollars and are taxed at the time the account holder makes withdrawals. Roth IRAs, however, are funded with dollars on which taxes have already been paid. Withdrawals from Roth accounts are tax-free once the owner reaches age 59½ and has had the plan for at least five years.

Intended as a middle-class savings vehicle, the accounts have income and contribution caps intended to dissuade use by the ultrawealthy.

While it is not on everyone's checklists, understanding how potential lawsuits might impact retirement savings could be important and is worth advisors being prepped to discuss with clients. Fifteen percent of Americans have reported being sued by debt collectors, according to a study by the Consumer Financial Protection Bureau. That includes medical debt — more than two-thirds of American hospitals sue patients over unpaid medical bills, according to the Kaiser Family Foundation, a health policy nonprofit.

Meanwhile, hundreds of thousands of Americans get sued every year for divorce. In 2021 alone, 689,308 marriages ended in divorce or annulment, according to the U.S. Centers for Disease Control and Prevention. In these instances in particular, retirement plans are most vulnerable.

"IRAs typically don't have the same lawsuit protections as employer-sponsored plans like 401(k)s, because 401(k)s are covered under ERISA," said Matt Garasic, a certified financial planner and the founder of Unrivaled Wealth Management. "That said, each state has distinct laws regarding IRA creditor protection."

For more on how to get the most out of Roth IRAs, catch up on our latest coverage below.

Unemployed? The best tips to keep on saving

Forty percent of Americans have been laid off or fired at some point in their lives, according to the Bureau of Labor Statistics, and in recent years, it's been happening more often. U.S. companies announced 721,677 job cuts in 2023, according to the research firm Challenger, Gray and Christmas — a 98% increase from the year before.

Five financial advisors provide guidance on staying on track financially after losing a job.

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Ask an advisor: I was laid off. How can I keep saving?

Ensuring your retirement plan is safe from lawsuits

While lawsuits are usually not usually top of mind when planning for retirement, understanding different rules for what can be seized from different accounts if the owner is successfully sued should be important. Employer-sponsored plans, such as 401(k)s and 403(b)s, are regulated under federal law — specifically, the Employee Retirement Income Security Act (ERISA) of 1974. The laws for individual retirement accounts (IRAs), however, vary from state to state.

"Every state has a different law about whether creditors can attack an IRA or not," Fred Reish, chair of the fiduciary services ERISA team at the law firm Faegre Drinker Biddle & Reath told Financial Planning's Nathan Place. "For example, California says you can retain the amount reasonably needed for retirement. But if you have more than that, the creditors can get to it."

Four advisors give their thoughts on which retirement plans are the safest from lawsuits.

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Ask an advisor: Which retirement plan is the safest from lawsuits?

Understanding Roth IRA guidelines

About 20% of Americans — 27.3 million households — owned a Roth IRA in 2021, according to the Investment Company Institute, a lobbying group for investment companies. In total, Americans have about $1.3 trillion invested in these plans.

But the IRS has strict rules about who can use a Roth IRA — and how much money they can make.

Should a 28-year-old lawyer get a Roth IRA before it's too late? Is time too short? Or should he do something else entirely? Advisors sound off.

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Ask an advisor: Am I too rich for a Roth IRA?

Rolling over college savings into a tax-free Roth

Under legislation signed into law at the end of 2022, investors can roll up to $35,000 from 529 savings plans into a Roth IRAs starting in 2024. The move morphs leftover money originally intended for a child's college (or kindergarten through 12th grade) costs into retirement dollars, all without hitting the saver or beneficiary with a tax bill. With tax-free growth and withdrawals, Roths are an engine of outsize savings and a favorite of wealth advisors, especially those to the affluent.

"Having the option to roll the funds into a Roth IRA will be a significant benefit that can also give a leg up to the beneficiaries in saving for retirement," Kristen Carlisle, the general manager of Betterment at Work, recently told Financial Planning.

The benefit was part of a $1.7 trillion federal spending bill that contained a welter of provisions aimed at improving Americans' retirement readiness, including that of higher earners.

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College savings plan money left over? Hello, tax-free Roth

Weighing the options of a traditional and a Roth 401(k)

The Roth 401(k) has become an increasingly popular option in recent years. Like a Roth IRA, it allows savers to contribute dollars on which taxes have already been paid and to make tax-free withdrawals later. And as with a traditional 401(k), a workhorse of employee-sponsored retirement plans, employers increasingly chip in as well.

In 2011, just 49% of employer-provided plans offered a Roth option. By 2020, that number had exploded to 86%.

Five advisors offer guidance to a young engineer just starting in his career working for an employer that offers not only a traditional 401(k), but a Roth option as well.

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Ask an advisor: Should I get a traditional or Roth 401(k)? My company offers both