For certain individuals, Roth IRAs can offer income and estate tax benefits that are preferable to those offered by traditional IRAs. However, it’s important to take note of just what the distinctive features of a Roth IRA are before making the choice.
Traditional vs. Roth
The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your current tax bill. You pay taxes on the funds when you make withdrawals. As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.
In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements). This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase.
Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of your Social Security benefits.
Additional Advantages
A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. With a traditional IRA, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than April 1 of the year following the year you reach age 73.*
Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over years, depending on the type and age of the beneficiary, allowing a continued opportunity for tax-free growth on assets remaining in the account. An added benefit to your heirs is that the distributions they receive from the Roth IRA won’t be subject to income tax.
Many Vehicles
As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA may or may not be one of them. Please contact our firm for individualized help in determining whether it’s a beneficial choice.
*Note: Under Secure 2.0, the required age used to determine distributions increased from age 72 to 73, starting on January 1, 2023. It will increase again to age 75 starting on January 1, 2033. (Previously, under the original Secure Act of 2019, the age rose from 70 1/2 under prior law, to 72.)
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
