How a ROTH IRA Could Save You Big Time in Retirement

In retirement, you have your normal, everyday expenses, but in some years, you will buy a new car or update your kitchen or be a really generous grandparent. 

From where will this extra money come?

Retirement portfolios are typically made up of a mix of different assets that are all taxed differently when withdrawn.  With ROTH IRAs, under certain conditions, withdrawals are fully tax-free.

If you need $20,000 for a new car purchase and your only option is a Traditional IRA/401k/403(b), all of those dollars will be taxable.  But it’s not just that tax will finally be paid on these tax-deferred funds; the additional taxable income could:

• Make your Social Security benefits more taxable.
• Move you into a higher marginal tax bracket.
• Make your Medicare Part B and D premiums higher in the future.
• Increase the tax rate on your capital gains.

But if the $20,000 is withdrawn from a ROTH IRA, no tax would be owed, and the withdrawal would not affect any of the items listed above. 

Financial planning and foresight at work!

Funding ROTH IRAs via contributions or conversions can have a significant payoff down the road.

Below are 10 reasons to make the ROTH part of your retirement portfolio:

1. Tax-Free Withdrawals in Retirement: One of the primary advantages is that qualified withdrawals in retirement are tax-free. This means any contributions and earnings grow tax-free, and you won’t owe any taxes on withdrawals in retirement, as long as you meet certain conditions.
2. Tax-Free Growth: The money invested in a Roth IRA grows tax-free, which means you don’t pay taxes on the capital gains, dividends, or interest earned on your investments within the account.
3. No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t have mandatory minimum distributions. This allows for more flexibility in managing your retirement income and can be particularly beneficial if you don’t need the funds and want to let them continue growing tax-free.
4. Flexibility in Withdrawals: Contributions to a Roth IRA can be withdrawn at any time without penalty. While it’s generally recommended to leave your retirement savings untouched, having access to contributions provides some flexibility in case of emergencies or unforeseen expenses.
5. Estate Planning Benefits: Roth IRAs can be passed on to beneficiaries tax-free. This can be a powerful tool for leaving a tax-free inheritance for your heirs.
6. No Age Limit for Contributions: While traditional IRAs have age limits for contributions (you can’t contribute after age 70 ½), Roth IRAs allow contributions at any age, as long as you have earned income.
7. Diversification of Retirement Income: Having a mix of Roth and traditional retirement accounts can offer flexibility in managing tax liabilities in retirement. Roth IRAs allow for tax-free withdrawals, potentially reducing the tax burden when combined with other retirement income sources.
8. No Impact on Social Security or Medicare Benefits: Withdrawals from a Roth IRA don’t affect the taxation of your Social Security benefits, and they also don’t count towards the income thresholds that trigger higher Medicare premiums.
9. Investment Options: Roth IRAs provide a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and more. This flexibility allows you to tailor your investments according to your risk tolerance and financial goals.
10. Tax Diversification: Having a mix of Roth and traditional retirement accounts can provide tax diversification in retirement. This gives you the flexibility to manage your tax liabilities and allows you to make strategic decisions about which accounts to draw from in retirement based on your tax situation at that time.

Any opinions are those of Landon Vick and not necessarily those of RJFS or Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decisions. 

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