Benefits of Roth IRA's

Most people know that Roth IRA’s have cool benefits, that’s one of the reasons converting traditional IRA assets to Roth IRA assets is a popular topic around the water cooler. But the Roth IRA has some unique benefits that often go underappreciated. When you’re still saving and accumulating for the work-optional phase of your life it can be difficult, or even unrealistic, to predict your future income or your taxes. At the end of the day, a Roth IRA is a great tool to maximize your financial flexibility.

Are Roth IRA’s really better?

Here is something you may not know. All things being equal, Roth and traditional IRA’s work out to the same amount of money that you get to spend. That’s assuming you were to save the same amount in each, get the same return in each, and your tax rate never changes. So wouldn’t it be better to get the tax deduction now? Well, your tax rate very well may change down the road, your income could change, tax brackets could change, and so much more. Now on to some of the benefits of a Roth IRA that you may or not be aware of.

Benefits of Roth IRA’s

Taxability of Social Security Benefits

Whether or not you have to pay taxes on social security depends on your other sources of taxable income, and distributions from a Roth IRA do not count as taxable income. The following table shows what amount of social security might be taxable based on your income.

(Taxes on social security chart)

Medicare Premiums

Even if you are a ways away from Medicare, this article is about planning ahead and managing your taxable income. Basically, Medicare premiums have a base rate and will be subject to IRMAA surcharges based on your taxable income from two years prior. Managing your taxable income with your Roth IRA can be important here since Roth distributions are not taxable.

Required Minimum Distributions

RMDs force you to start withdrawing money from your Traditional IRA once you reach age 73 (based on the year you were born), even if you don’t need the money. These forced withdrawals can push you into a higher tax bracket, meaning you could end up paying more in taxes than you anticipated. A Roth IRA is a great tool in managing this, other options include investing the taxed distribution or if you are charitable, charitable contributions can satisfy your RMD requirements without a cut going to Uncle Sam.

Benefits to Beneficiaries

When you inherit an IRA, you have to withdraw the funds in 10 years, there are a lot of rules around this. If you’re thinking about leaving an IRA to your heirs, a Roth IRA can be a far more tax-efficient choice. When your beneficiaries inherit a Roth IRA, they can withdraw the money tax-free, instead of at their tax rate. Anyone inheriting money also needs to think about all of the other considerations that depend on taxable income.

One Reason You Wouldn’t Want To Use A Roth IRA

• No RMDs: Unlike Traditional IRAs, IRAs allow your money to grow tax-free for as long as you live, giving you more flexibility in your retirement planning.

• Tax-Free Withdrawals: Since you pay taxes upfront with a Roth IRA, all withdrawals in retirement are tax-free.

• Beneficiary Benefits: Under the 10-year rule, your heirs can withdraw the money from an inherited Roth IRA tax-free over a decade.

• Social Security and Medicare: Because the income from Roth distributions are not taxable, they will not increase taxes on social security or Medicare premiums.

  
  

With all of the benefits that we have covered, why would you want anything besides a Roth IRA? You don’t really need to worry about RMD’s if you need to withdraw more than the minimum anyway. Your other sources of income might negate the Roth benefits regarding social security and Medicare.

Here is probably the biggest reason to use a traditional IRA instead of a Roth IRA, current taxes. If you are in a high tax bracket now, it just may make sense for you to take the tax deduction now. Depending on your income, you might not be eligible to contribute to a Roth IRA, (although a Roth 401k could be one of several solutions). I admit it, we do love Roth IRAs for the great financial flexibility they offer, but at the end of the day there is no such thing as a one-size-fits-all all solution.

Final Considerations About Roth IRA’s  

By diversifying your retirement accounts, you create flexibility that allows you to navigate varying tax rates and financial needs as they arise. This flexibility allows you to draw from different accounts in retirement so you can manage your taxable income and potentially reduce your overall tax burden. For example, in years when your income is lower, you might choose to withdraw from your Traditional IRA, taking advantage of the lower tax bracket. In years when your income is higher, you could rely more on your Roth IRA, avoiding additional taxable income.

By intentionally choosing the right types of accounts now and diversifying your retirement assets, you’re setting yourself up for greater control and financial security in the future. Whether you’re just starting out or looking to fine-tune your retirement strategy, considering a Roth IRA could be a game-changer for your financial future. If you want help navigating some of this, it all starts with a meaningful conversation. Start at https://www.daleyfp.com/financialplanning and schedule an introduction call.