by Tom Andrews, CPA
Now that 2018 has ended many taxpayers are looking forward to 2019 with their renewed financial goals. One of those goals is to start contributing to a retirement account. While the yachting profession does provide a number of advantages one of the disadvantages is that employer sponsored retirement plans are not always offered to crewmembers working on foreign flagged or US flagged vessels. Just because your employer does not offer a retirement account does not mean you do not have options. One of the options available is an IRA and for the purpose of this column we will be discussing the “Roth IRA”.
Roth IRAs are tax-favored accounts to which qualified taxpayers can make after-tax contributions. Contributions to the account can grow tax-free, and neither the contributions nor the earnings on them are subject to tax when a Roth IRA owner receives a qualified distribution from the account. Although a Roth IRA is designed to help a taxpayer save for retirement, it is inaccurate to characterize a Roth IRA as just a retirement savings vehicle. A Roth IRA can offer tax, estate planning, and financial planning advantages that are not available with respect to a traditional IRA.
Roth IRAs offer several advantages over traditional IRAs.
- First, an individual can make contributions to a Roth IRA regardless of age.
- Second, distributions can be made completely tax free, as long as they are qualified distributions (generally, distributions made more than five years after the contribution that are made after the owner has attained age 59½, died, or become disabled, and distributions for certain special purposes, including the purchase of a first home).
- Third, the owner is not required to take lifetime distributions, so the tax-free buildup can continue throughout the owner’s life.
- Fourth, distributions of contributions are always tax free, no matter when they are made.
The fact that you can withdraw the annual contributions made to the Roth IRA at any time without incurring any tax means that these accounts can serve financial planning goals that cannot be served by a traditional IRA. Before making a contribution to a traditional IRA (or other retirement plan), it generally is important to be sure that you can afford to be without the funds for some period of time, since tax and often heavy penalties are imposed when amounts are withdrawn. However, in the case of a Roth IRA, withdrawals before the five-year requirement is satisfied are tax free as long as they consist only of contributions. As a result, a Roth IRA can act as an emergency fund since you can make tax-free withdrawals from the account to the extent of the contributions made to the account. While most foreign flagged vessels do not offer retirement plans for crewmembers some of the US flagged vessels do offer this benefit. If you do work for an employer that does offer a retirement account we recommend that you do participate as most employers do offer some type of match to your contribution.