'If you qualify, I think you should strongly contribute each and every year': Retirement expert on Roth IRA

Managing Director, Sun Group Wealth Partners, Winnie Sun, joined Yahoo Finance Live to break down her thoughts on where to put your money for retirement.

Video Transcript

ADAM SHAPIRO: I want to move to retirement issues in our retirement segment, which is brought to you by Fidelity Investments. A lot of confusion for a lot of us between IRAs, both the Roth IRA and a traditional IRA. And hopefully one day, we will all appreciate not being able to fund an IRA because we will make too much money and hit the federal cap.

But to understand more about this, let's invite into the stream Winnie Sun, Managing Director Sun Group Wealth Partners. Good to have you here. Very simply, traditional IRA, when you withdraw, you get taxed. A Roth IRA, you don't get taxed when you withdraw. How do you decide which is the right version of the IRA for you?

WINNIE SUN: That's a great question, Adam. I think, you know, whichever direction you go, you should actually, if you can, contribute to an IRA each and every year. But simply put, you know, there are some income caps. I actually think the Roth IRA is like the golden egg. If you qualify, I think you should strongly contribute each and every year.

As long as you make less than $125,000 as an individual when you file your taxes or as a married couple, if the two of you file and you earn less than $198,000, then you can go directly to the Roth. So that would be my first route. If you can't do that, then the traditional IRA could actually go through a conversion into a Roth as well. So that's something that you should speak to your tax accountant about.

SEANA SMITH: Winnie, are there some instances where maybe it makes sense to do both?

WINNIE SUN: Well, Seana, that's a good question. You know, we're allowed to contribute to both each and every year. But I will tell you-- in, like, 20-plus years as a financial advisor, I've yet to see a client contribute to both. I would say it's best to pick one or the other. There are benefits to both, but typically, it's pretty clear in that particular year which would benefit you more-- it's either if you want to pay taxes later or you want to pay taxes ahead of time.

ADAM SHAPIRO: In the last century, I had the opportunity to roll over a 401(k) into an IRA, which in 1999 the government allowed me to convert to a Roth-- I paid the taxes then and there. Fast forward to 2021-- after reading your notes on this, that Roth IRA, I still got it. But I don't have to take money from it when I retire. And if someone's lucky enough to be in my good graces, I can leave that to them, and they don't have to pay taxes on it, right?

WINNIE SUN: Absolutely, Adam. This is a big deal. So for example, if you are-- you know, you have sufficient income and savings to provide for your later years, absolutely, you can continue to keep that Roth IRA invested. You don't need to take withdrawals. You can leave it to your kids, or grandkids, and whatnot.

And now they will also inherit the tax benefits of it being tax free distributions. But they will have to take it out within five years. But nonetheless, that's a great way to move assets from one generation to another.

SEANA SMITH: And, Winnie, talking about this-- I'm looking at your notes right now-- you're talking about the Roth IRA, the benefits here to note-- and you mentioned first time homebuyer clause. Explain to us exactly what you mean.

WINNIE SUN: This is great. So for a young person, or you don't even have to be-- you can be any age-- but for your first home purchase, a Roth IRA does give you some benefits. You're actually able to withdraw up to $10,000 for the purchase of a home. Now, there is a caveat-- you do have to have this account open for at least five years. But once you do do that, these funds can be used pretty flexibly.

This is not just for your first home purchase. It could be down payment, closing costs, and it's treated like a qualified distribution, which means, then, you don't have to pay income taxes or early withdrawal fees-- not only on the principle that you're taking out, but as well as the profit that you take out of that $10,000.

ADAM SHAPIRO: On the traditional IRA side, at what age does the government essentially say, start taking money-- we need to tax you.

WINNIE SUN: Well, you know, historically, taking out money from the traditional IRAs, people are saying, well, why do we have to do it? Well, the IRS hasn't collected money on your traditional IRA contribution yet. So as it continues to grow, at some point the IRS is going to want a piece of your retirement savings.

So usually, that number would be 70 and 1/2-- if you were born before the year of 1949, generally. But after that, then you have until age 72. And that's actually call the required minimum distribution, or RMD for short. So that requires to take a certain amount. And it's calculated based on your life expectancy.

So unlike the Roth, where you can just continue to let it grow, the traditional IRA, at some point, you're going to have to take out some money.

ADAM SHAPIRO: Can you make a contribution to a traditional IRA if you are fortunate enough to earn more than the salary cap?

WINNIE SUN: Yes. So if you make more than the salary cap of the Roth IRA, you can always--

ADAM SHAPIRO: Not the Roth, the traditional.

WINNIE SUN: Right. You can always contribute to the traditional IRA. But here's something to keep in mind-- the traditional IRA is always going to be available to you, regardless of how much income you earn, as long as you have W-2 income. Now-- or 1099 income, I should say. But the caveat here is this-- it could be potentially tax deductible up front, but then you'll have to pay taxes on the back end.

There is another thing that you could consider doing. If your income is too high and you can't go directly into a Roth but you have your heart set on a Roth IRA contribution, you could actually make a non-deductible traditional IRA contribution. So you don't get it deducted for the traditional IRA contribution.

And then you can soon after decide on whether or not you want to do a Roth IRA conversion, right? Now, if you do this very quickly and there hasn't been much growth in this portfolio, then you're not really subject to taxes there. The money then gets put into a Roth IRA-- kind of like what you talked about, Adam, earlier when you did this with your previous retirement plan, your company plan-- going into conversion. So that's an option. If you're interested in doing that, I definitely would consult a tax professional before doing that.

ADAM SHAPIRO: Winnie, I'm going to suggest we bring you back and do a whole hour webinar with you-- Q&A on retirement. Really appreciate your insight. Well, I got to tell you-- I was thinking about that Roth IRA that I did a million years ago, I keep hearing Tina Turner in my head saying to my potential heirs, you better be good to me. Thank you so much-- Winnie Sun, Managing Director Sun Group Wealth Partners.