Tax Planning: Roth Options

Tax Planning: Roth Options

View Retirement Tax Planning Guide

Roth Options

A potential downside of tax-deferred saving is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, however, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income:

1. Roth IRAs. In addition to tax-free distributions, an important benefit is that Roth IRAs can provide estate planning advantages: Unlike other retirement plans, Roth IRAs don’t require you to take distributions during your lifetime.

But Roth IRAs are subject to the same low annual contribution limit as traditional IRAs, and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year. It may be further limited based on your AGI.

2. Roth conversions. If you have a traditional IRA, consider whether you might benefit from converting all or a portion of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth and take advantage of a Roth IRA’s estate planning benefits.

There’s no income-based limit on who can convert. But the converted amount is taxable in the year of the conversion.

Whether a conversion makes sense for you depends on a variety of factors, such as:

  • Your age,
  • Whether the conversion would push you into a higher income tax bracket or trigger the NIIT,
  • Whether you can afford to pay the tax on the conversion,
  • Your tax bracket now and expected tax bracket in retirement, and
  • Whether you’ll need the IRA funds in retirement.

Warning: Unlike before the TCJA went into effect, you can’t change your mind during the year and recharacterize a Roth conversion back to a traditional IRA.

View our Retirement Tax Planning Guide for more information about:

401(k)s and other employer plans

Traditional IRA

Roth options

Plans for business owners and the self-employed

Early withdrawals

COVID-19-related distributions

Leaving a job

Required minimum distributions

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