03 Jan I’m starting my first Roth IRA. Where should I invest?

Q. I’m starting my first Roth IRA. I know the stock market has been doing well and I’m hoping that continues. Where should I invest the money? I don’t have anything else for retirement.
— New investor

A. Congratulations on your decision to fund your first Roth IRA.

This is an essential first step in creating tax-free income for yourself during your retirement years.

For 2020, you can make a Roth IRA contribution of $6,000, plus an additional $1,000 if you are age 50 or older, said Timothy Brunnock, a financial advisor and attorney with Trinity Financial Strategies in Morristown. You also have until April 15, 2020 to make a contribution for the 2019 tax year.

However, there are income eligibility restrictions.

“For 2020, singles must have a modified adjusted gross income (MAGI) of $139,000 or less and contributions begin to be phased out starting with a MAGI of $124,000,” he said. “Married couples must have modified adjusted gross incomes of less than $206,000 to be eligible to contribute to a Roth, and contributions are phased out starting at $196,000.”

The key difference between Roth and traditional IRAs is the timing of how they are each taxed.

With traditional IRAs, you can deduct your contributions in that taxable year, Brunnock said. You pay taxes at your regular taxable rate when you withdraw the money. You can begin taking distributions without penalty as early as age 59 1/2. At age 72, you must begin taking Required Minimum Distributions (RMDs), he said.

Brunnock said that differs from Roth IRAs. With Roths, you are not able to take a deduction in the year in which you make the contribution. In other words, you are using after-tax money to fund a Roth. However, the key benefit is that when you take distributions later in retirement, those distributions are not taxed to you, he said.

“A client of mine who owns a farm in Sussex County summed it up this way: ‘I’d much rather pay tax on the seed than pay tax on the entire harvest,’” he said. “Pretty sound advice.”

In terms of where you should invest the money, there are a number of factors that you should consider.

As a general rule, the further away your retirement is, the more aggressive you can be with your investment decisions, Brunnock said.

For example, a 35-year-old who would like to retire at age 65 has at least a 30-year time horizon. He or she could conceivably withstand the ups and downs of normal market volatility — and perhaps even a recession or two — and look to maximize their returns over a long-time horizon, he said.

“On the other hand, someone who would like to retire within five years may be inclined to invest more conservatively,” he said.

Because we don’t know your age, and because everyone’s circumstances, risk tolerances and goals are different, this could be a good time to engage the help of a financial advisor.

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This story was originally published on Jan. 3, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.