One of the Best Reasons to Choose Roth Over Traditional Retirement Accounts
The financial advice world may never settle the traditional vs. Roth debate. While I’m partial to using traditional retirement accounts whenever possible, Roth accounts certainly have their place, as do taxable accounts.
Using a traditional IRA or 401(k) gives you a lot of opportunities to keep your tax bill low and make the most of your savings. There are dozens of strategies you can implement.
The thing is, you have to be willing to take an active role in your retirement and tax planning in order to make the most of traditional retirement accounts. If you’re not into that, a Roth is a superior option for this single reason.
It doesn’t get any simpler than this
The tax planning for a Roth retirement account is simple. You pay taxes on your contributions to a Roth account the year you make them. When you go to take a withdrawal, there are no tax implications.
Distributions don’t count toward your adjusted gross income. As such, you can take withdrawals without worrying how it might impact other factors, including taxes on Social Security benefits and Medicare Part B and D premiums.
If you invest in a taxable account, as well as a Roth account, you’ll have a lot of headroom to take capital gains while paying the 0% tax rate. In fact, the average retiree with assets held mostly in Roth and taxable accounts probably won’t pay any taxes in retirement.
Additionally, Roth IRAs aren’t subject to required minimum distributions (RMDs). Retirees must start taking withdrawals from their non-Roth pre-tax retirement accounts at age 72.
These withdrawals may be bigger than a retiree actually wants or needs, forcing them to reinvest in taxable accounts. With a Roth account, the money can stay in the tax-free account as long as the owner wants.
Roth 401(k)s, however, are subject to required minimum distributions. You can easily avoid these by rolling over the account to a Roth IRA once you leave your job.
One final tax consideration is the money you leave your heirs in a Roth IRA remains tax free. If you don’t want your estate to become a significant tax burden to your children or grandchildren, a Roth will save them from having to plan the best way to take withdrawals for the smallest impact on their tax bills.
Basically, tax planning with just a Roth IRA isn’t a thing. It’s as simple as it gets.
Can and should you contribute to a Roth?
If your workplace offers a Roth 401(k), you can contribute to the Roth account. Be aware, however, that any employer matching contributions will go in a separate pre-tax account.
Roth IRAs are technically restricted by your income. If your adjusted gross income exceeds $144,000 as a single person or $214,000 for a married couple, you can’t contribute directly to a Roth IRA.
At those income levels, you’re no longer eligible for a tax deduction from traditional IRA contributions if you also participate in a workplace retirement plan. You can, however, make non-deductible contributions to a traditional IRA and then convert those funds to a Roth IRA. This strategy is called the backdoor Roth and effectively removes the income limit.
Whether you should contribute to Roth accounts is in part a matter of how much you value the simplicity they can offer. Retirement planning can be extremely complicated with a lot of intricacies. If you don’t want to do the tax planning (or pay an expert to do it for you), then a Roth could be worth it for you.
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