TAKE NOTE OF THE DISTINCTIVE FEATURES OF ROTH IRAs

For some people, 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 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.  Your contributions can continue after you reach age 70 ½ as long as you’re earning income, and the entire balance can remain in the account until your death.  In contrast, beginning with the year you reach age 70 ½, you can’t contribute to a traditional IRA – even if you do have earned income.  Further, 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 70 ½.

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 their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account.  Further, 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.