Cortburg Speaks Retirement

Retirement Planning: Roth or Not to Roth

May 26, 2021 Miguel Gonzalez, MBA, AIF®, CPFA®, CRC® Season 2021 Episode 35
Cortburg Speaks Retirement
Retirement Planning: Roth or Not to Roth
Show Notes Transcript

In this week’s episode, I will help you answer an often confusing retirement planning question: To Roth or Not to Roth?


INTRODUCTION

Welcome to Cortburg Speaks Retirement

An audio podcast about investing in the stock market, financial planning, money management and retirement planning.  Each Wednesday, we help investors at all stages of life learn how to potentially grow and preserve their money from first job through retirement.

Now here is your host, Miguel Gonzalez.

 

HOST

Good morning and welcome to the CORTBURG SPEAKS RETIREMENT audio podcast.   

In this week’s episode, I will help you answer an often confusing Retirement Planning question: To Roth or Not to Roth?

When saving for retirement, it often makes sense to contribute to employer-sponsored retirement plans to take advantage of any available employer match opportunities. However, not everyone has access to an employer-sponsored plan. Even if you do, there are reasons you may want to consider using Traditional and/or Roth IRAs to supplement your retirement savings. There are important differences between the two types of accounts.[i] Understanding the potential benefits and drawbacks of each type of IRA can help you make more informed decisions.  

Potential Benefits and Considerations 

Regardless which type of IRA you choose, the contribution limits are the same, although Roth IRAs contributions are subject to income limits.[ii] Traditional IRA contributions are not limited by income levels unless you or a spouse was covered by an employer-sponsored plan during the year of the contribution. In 2021, the total amount you can contribute to your Traditional and Roth IRA accounts is the lesser of your taxable compensation for the year or $6,000 ($7,000 for those age 50 or older.)[iii] 

However, there are important differences in tax treatment for these accounts. If your income is below certain thresholds, you may be able to deduct some or all of your contributions to traditional IRAs, reducing your taxable income in the year of the contributions.[iv] Taxes on contributions and any growth are deferred until you begin withdrawing them. So, if your tax bracket in retirement is lower than in your earning years, you may pay less in taxes on your retirement dollars. 

In contrast, you cannot deduct contributions to a Roth IRA – those are after-tax contributions.[v] However, qualified distributions from Roth IRAs are not subject to federal income taxes, potentially lowering your tax burden in your retirement years.[vi] Generally speaking, Roth IRAs may make sense for investors who expect to be in a higher tax bracket in their retirement than in their working years. And, unlike Traditional IRAs, Roth IRAs are not subject to IRS Minimum Required Distribution rules, giving account owners more control over deciding when to access and use their retirement accounts.[vii]

Roth IRA Conversions

If the idea of using a Roth IRA to supplement your retirement savings appeals to you but you do not meet the income limits to contribute to one, you may want to consider making non-deductible contributions to a Traditional IRA and then converting the account to a Roth IRA. There are no income limits for Roth IRA conversions.[viii] 

A Roth conversion changes an existing traditional IRA or 401(k) into a Roth IRA, converting the assets so they will grow on a tax-free basis, rather than a tax-deferred one. However, the catch is that you must pay income taxes on any previously untaxed amount converted, in the year of conversion.[ix] There are also rules specifying that you must leave converted dollars in the Roth IRA account for at least five years before withdrawing them. Withdrawing them before the five years are up may subject you to a 10 percent penalty on the withdrawn amount.[x] 

Seek Guidance and Weigh Your Options Carefully

Ultimately, there is not a bright-line test to determine whether a Traditional or a Roth IRA is best; the answer depends on your current situation and anticipated circumstances in your retirement years. 

If your income has dropped so you are in a lower tax bracket in 2020 than in previous years, it may make sense to consider a Roth contribution or conversion. Or, if you are concerned about your tax obligations for 2020, you may be able to make a deductible contribution to a traditional IRA by April 15, 2021.[xi] 

Talk to your financial professional to learn more about different types of retirement planning vehicles, and to explore whether a Roth IRA may make sense for you. 

 

Make sure to visit our website, www.CortburgRetirement.com. Our site is filled with educational videos, eBooks, publications, and financial calculators designed to help you learn more about your finances.  As you search our site, send us a note regarding any questions you may have about any particular investment concepts or products. We will get back to you quickly with a thoughtful answer.

This is Miguel Gonzalez, Retirement Specialist and Managing Partner, with Cortburg Retirement Advisors signing off for this week’s educational podcast.  

 

DISCLOSURES  

Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision. 

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

CRC conferred by The International Foundation for Retirement Education.

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.  

Private Advisor Group, LLC and Cortburg Retirement Advisors, Inc. are separate entities from LPL Financial.

Investing involves risk including possible loss of principal.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. 

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. 

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.                                  


[i] https://www.irs.gov/retirement-plans/traditional-and-roth-iras 

[ii] https://www.irs.gov/taxtopics/tc309 

[iii] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits 

[iv] https://www.irs.gov/retirement-plans/ira-deduction-limits 

[v] https://www.irs.gov/retirement-plans/roth-iras 

[vi] https://www.irs.gov/publications/p590b#en_US_2019_publink1000231061 

[vii] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds 

[viii] https://www.thebalance.com/should-you-do-a-roth-conversion-2894481 

[ix] https://www.fool.com/retirement/plans/roth-ira/conversion/ 

[x] https://www.businessinsider.com/roth-ira-5-year-rule 

[xi] https://www.irs.gov/retirement-plans/ira-year-end-reminders 

Sources

https://www.irs.gov/retirement-plans/traditional-and-roth-iras

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

https://www.kiplinger.com/retirement/retirement-plans/roth-iras/601720/who-should-consider-a-roth-ira-and-why-now

https://www.thebalance.com/should-you-do-a-roth-conversion-2894481

https://www.fool.com/retirement/plans/roth-ira/conversion/

https://www.businessinsider.com/roth-ira-5-year-rule