NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesHard
A client, aged 35, is planning for retirement at age 65. They are currently contributing to a 401(k) plan. Their investment adviser recommends increasing contributions to a Roth IRA, even though they are in a relatively high tax bracket now. What is the primary advantage of contributing to a Roth IRA for this client, given their long time horizon and current tax situation?
- ANo income limitations for contributions.
- BTax-free withdrawals in retirement.
- CTax-deductible contributions in the present.
- DAbility to invest in a wider range of assets.
Show answer & explanationAnswer & explanation
Correct answer: B. Tax-free withdrawals in retirement.
The primary advantage of a Roth IRA, especially for a client in a high tax bracket with a long time horizon, is that qualified withdrawals in retirement are entirely tax-free. While contributions are not tax-deductible, the tax-free growth and withdrawals can be highly beneficial if the client expects to be in a higher tax bracket in retirement or if tax rates increase in the future.
Why the other options are wrong
- A. Roth IRAs do have income limitations for direct contributions, making this statement incorrect.
- C. Roth IRA contributions are made with after-tax dollars and are not tax-deductible.
- D. The range of assets available in a Roth IRA is generally similar to other retirement accounts, not necessarily wider.
Roth IRA Advantages
A retirement savings plan where contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.
- Tax-free withdrawals in retirement are the major benefit.
- Contributions are not tax-deductible.
- Suitable for those who expect to be in a higher tax bracket in retirement.
Memory trick: Roth is about 'FUTURE' tax savings: Free withdrawals, Understanding tax brackets, Retirement planning, Ultimate growth.