Pub. 9 2019-2020 Issue 5

12 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org FEATURE ARTICLE BY CHRISTLE JOHNSON, QKA, CIP Rainy Day Roth IRA: Saving for Retirement and the Unexpected M any low- to moderate-income Americans struggle to come up with the money to cover financial emergencies. Many of your clients likely use their checking or savings accounts for their monthly or recurring expenses, but find that paying for things beyond that to be a challenge. Building an emergency savings fund should be a priority. A Roth IRA could be the “rainy day” fund that they need. Because of its unique characteristics, a Roth IRA not only serves to supplement retirement income, but also is a great resource to draw from for unexpected expenses. Unexpected Expenses Many adults are not prepared to withstandevensmallfinancialdisruptions, such as a car repair or replacing a broken appliance. In its Report on the Economic Well-Being of U.S. Households in 2018, the U.S. Federal Reserve found that 39% of American adults do not have the funds to pay for a $400 emergency. Specifically, 27% said they would borrow or sell something to pay for the expense, and 12% said they would not be able to cover the expense at all. The remaining 61%who said they could cover the emergency also said they would use cash, savings, or a credit card paid off at the next statement. Healthcare Out-of-pocket healthcare expenses are a common unexpected expense that can become a substantial hardship for those without emergency savings. The Federal Reserve indicates that 24% of adults went without some formofmedical care in 2018 due to an inability to pay. While the reasons for going without medical treatment may vary, these differences suggest that more Americans with modest income forego medical treatments thanthosewithhigher incomes. The Federal Reserve also reports that 90%of thosesurveyedhadhealthinsurance in 2018, either through their employers or labor unions, Medicare, or one of the health insurance exchanges. Of those who wereuninsured, 38%wentwithoutmedical treatment because of an inability to pay, comparedto22%ofthosewhowereinsured. While a health savings account (HSA)may be the best option to cover any necessary out-of-pocket medical expenses, only those who have an HSA-compatible high deductible health plan qualify for anHSA. Thus, aRoth IRA can be a viable option for medical emergencies as well. Education Paying for higher education can be a heavy financial burden for many Americans who are not adequately prepared for the expense. On average, Americans spend $25,000-$40,000 per student per year on college, according to the College Board Annual Survey of Colleges. Hidden costs or overlooked education expenses, such as textbooks and materials, add-on supplies, activities, and miscellaneous fees often add up. While some may use 529 accounts (tax-deferred savings vehicles with potentially tax-free earnings, under Internal Revenue Code Section 529) to save for college on a child’s behalf, Roth IRA contributions can be withdrawn tax-free to help with these expenses. And if theRoth IRAownermust tap into other assets in the Roth IRA, a distribution to pay for qualified education expenses will not subject the owner to the IRA 10% early distribution penalty tax. “Rainy Day” Roth IRA Using a Roth IRA as an emergency savings account allows the Roth IRA owner to keep the money separate from the individual’s other bank accounts, while saving for retirement. A Roth IRA “rainy day fund” has unique advantages. • RothIRAowners getmore for their dollars through theRoth IRA’s tax- deferred earnings on investments and compounding interest. • Roth IRA owners always have access to their Roth IRA assets. • Like the deposits into a checking or savings account, Roth IRA c ont r i bu t i on s a r e a lway s withdrawn tax and penalty free. • Opening a Roth IRA at an early age jump-star ts retirement savings.