As retirement approaches, many feel concerned about their long-term financial security. One way to improve your retirement security is to contribute to a Roth IRA.
A Roth IRA is a retirement account that allows you to contribute after-tax dollars now, and take tax-free distributions later on during retirement.
A Roth IRA can be a good choice to boost retirement savings for several reasons...
If you'd like to discuss this individually, here's a link to our page where you can request a personal consultation: How to Build a Roth IRA
#1 - Tax-free distributions in the future
Contributions can be withdrawn from Roth IRA accounts at any time without tax or penalty.
Roth IRA earnings can be withdrawn without penalty or tax once you've reached age 59 1/2 and once you've had a Roth IRA for at least five years.
For example, Jane invests $5,000 into a Roth IRA and it grows to $10,000 over time.
Jane can withdraw her $5,000 investment any time without tax or penalty.
Once she's had her Roth IRA for at least 5 years and once she's obtained age 59 1/2, she can also withdrawal her $5,000 in earnings without any tax.
If Jane had instead invested $5,000 into a brokerage account, she'd have to pay tax on any interest, dividends, and capital gains the investment generates which results in more tax for Jane compared to the Roth IRA.
The tax-free growth provided by a Roth IRA is particularly valuable if tax rates increase in the future.
The table below compares current federal tax rates vs. the federal tax rates that are scheduled to go into effect in 2026 unless congress extends tax cuts passed in 2017.
#2 - No Required Minimum Distributions
Unlike traditional IRA withdrawals, which are subject to required minimum distributions (RMDs) at age 73, Roth IRA withdrawals are not subject to RMDs.
This means that you can let your money continue to grow tax-free potentially for decades to come.
#3 - Estate Planning Advantages
Beneficiaries of inherited Traditional IRAs are forced to distribute the full account balance within 10 years of the date of death of the original IRA account owner.
Distributions count as taxable income, which can increase tax liability for beneficiaries.
Beneficiaries of inherited Roth IRAs also have to distribute the full account balance within 10 years of the date of death of the original IRA account owner.
However, these distributions are tax-free.
This is a clear win for beneficiaries of inherited Roth IRAs vs. inherited Traditional IRAs.
Income Limits
For tax year 2023, Modified Adjusted Gross Income must be below $218,000 for married couples and $138,000 for single filers to be eligible to make a full Roth IRA contribution.
The table below from the IRS website has more details.
Contributions Limits
For tax year 2023, individuals age 50+ can contribute a maximum of $7,500 into a Roth IRA or 100% of earned income, whichever is less.
For married couples where only one spouse works, the non-working spouse can also contribute the maximum to a Roth IRA if the working spouse is earning more than 2x the annual Roth IRA contribution.
For example, the working spouse must be earning above $15,000 for tax year 2023 for both the working spouse and the non-working spouse to be eligible to contribute the full $7,500 each into Roth IRAs.
Contribution Deadlines
You have until the tax deadline in April 2024 to make a Roth IRA contribution for tax year 2023.
You can make a Roth IRA contribution for tax year 2024 as soon as Jan 1, 2024.
Summary:
Roth IRAs can be an effective tool to boost retirement savings due to tax-free growth, no Required Minimum Distributions at age 73, and estate planning advantages.
That said, fund Roth accounts won't always make sense to fund now.
For example, if your current taxable income is much higher than your taxable income will be in retirement, waiting to fund Roth accounts by performing Roth conversion in retirement could be a better way to minimize your overall tax liability.
If you'd like to discuss this individually, here's a link to our page where you can request a personal consultation: How to Build a Roth IRA
This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures