Benefits of a Roth IRA

Planning for retirement isn’t just about growing your savings; it’s about ensuring you can tap into them efficiently when the time comes. One way to do that is through a Roth IRA. This account offers a great way to generate a steady stream of tax-free income in retirement. In fact, a study by the Employee Benefit Research Institute in June 2024 found that the number of U.S. families with assets in retirement accounts grew from 50.5% in 2019 to 54.3% in 2022, and a big driver of that was an increase in Roth IRA ownership.¹

While Roth IRA contributions aren’t tax-deductible upfront, the real benefit lies in how your money grows tax-free. That means any interest, dividends, and capital gains you earn in the account aren’t taxed when you take them out in retirement. Over time, this allows your investments to grow faster because you’re not losing any of your returns to taxes. Just follow the rules, and you can enjoy tax-free withdrawals in retirement.

For 2024, you can contribute up to $7,000 to a Roth IRA or $8,000 if you’re 50 or older. However, your ability to contribute depends on your modified adjusted gross income (MAGI). For instance, if you’re a married couple filing jointly, you can make the full contribution if your MAGI is under $230,000. If you’re single, you can contribute fully if your MAGI is under $146,000.²

Maximizing your contributions could be a smart move, especially with tax rates potentially rising in the future. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced taxes for many, but those tax cuts are set to expire at the end of 2025. Without further legislation, we could see higher tax rates and broader tax brackets starting in 2026.³

No RMDs Required

One of the key benefits of a Roth IRA is that it doesn’t require you to take RMDs. That’s a major difference from traditional IRAs, which require you to start taking RMDs by April 1 of the year after your 73rd birthday. These mandatory withdrawals can complicate tax planning and might drain your account faster than you’d like. With a Roth IRA, your investments can keep growing, giving you more flexibility and control over when you make withdrawals. The longer your money stays invested, the more it can compound, which can significantly boost your retirement savings.

When you’re ready to start withdrawing from your Roth IRA, your contributions come out tax and penalty-free. Earnings are also tax and penalty-free if you’re over 59½ and have held the account for at least five years. If you’re younger or haven’t met the five-year mark, you could face taxes and a 10% penalty on withdrawals of earnings, though there are some exceptions, like buying your first home or paying for medical expenses.⁴

Investment Flexibility

If you’re thinking about converting a traditional IRA to a Roth IRA, doing so in a low-income year or when you expect your future tax rate to be higher can be a smart move. Converting does trigger taxes on the amount converted, so it’s best to do it when your taxable income is low—such as during early retirement, after a job loss, or in a year with large deductions. Converting during a market downturn can also work in your favor since the tax hit is based on the current (reduced) value of your account. Once the conversion is complete, future withdrawals from your Roth IRA are tax-free, which can be a big advantage if tax rates go up.

Roth IRAs also offer flexibility in managing your retirement income. For example, you can use Roth withdrawals to cover living expenses while you delay taking Social Security benefits, which increase by 8% annually if you wait beyond your full retirement age. And since Roth withdrawals aren’t taxed, they won’t bump you into a higher tax bracket like withdrawals from a traditional IRA or 401(k) could.

Having a Roth IRA as part of your retirement portfolio provides valuable income tax diversification, offering greater control over how and when you’re taxed. With a Roth IRA, qualified withdrawals are tax-free, unlike traditional IRAs or 401(k)s, which are taxed as ordinary income when withdrawn. This allows you to strategically choose between taxable and tax-free income sources in retirement, helping you manage your overall tax bracket. By diversifying across different types of accounts, you can optimize your tax liability and make more informed decisions about withdrawals based on your current financial situation.

Roth IRAs are an excellent tool for transferring wealth because they allow you to pass on assets to your heirs in a tax-efficient manner. Unlike traditional IRAs, Roth IRAs offer the dual advantage of tax-free withdrawals and no required minimum distributions (RMDs), meaning your investments can grow tax-free throughout your lifetime. That means you can pass more money to your heirs, and they’ll enjoy tax-free withdrawals from the Roth, provided the account has been open for at least five years. This can be particularly valuable for heirs in high tax brackets, as Roth IRAs help reduce tax burdens on inherited assets. In short, a Roth IRA can help you maximize the legacy you leave behind.

Final Thoughts

Roth IRAs offer flexibility, tax efficiency, and powerful wealth-building opportunities. They’re a great way to save for and maximize your income in retirement. We’re here to help you with your financial planning to maximize your income during retirement. Contact us to get started on the path to meet your financial goals and dreams.