Using Roth IRAs & Roth 401ks In Retirement

Smartly using your Roth IRAs and Roth 401k accounts can help you lower the income taxes you’ll pay during retirement and also increase your wealth for future needs and goals. Here are three ways you can strategically use your Roth accounts during your retirement to maximize your savings. But first, let’s understand some basic rules about these accounts.

Basic Rules About Roth Accounts

• Eligibility: Anyone can contribute to a Roth IRA if they meet certain eligibility rules. You can also contribute to a Roth account in your employer’s 401k plan, provided it’s available.
• Earned Income Requirement: Contributions to Roth IRA or 401k must come from money you’ve earned yourself, like a paycheck from an employer or money from self-employment.
• Tax Treatment: Contributions are made with after-tax dollars—meaning you pay taxes on the money before you contribute. Withdrawals of contributions and the profit from investments (earnings) are tax-free since taxes were already paid.
• Minimum Distributions: Roth IRAs do not require withdrawals at a certain age, unlike other retirement accounts which mandate withdrawals that increase your taxable income during retirement.

Reducing Income Taxes

If you expect to be in a higher tax bracket during retirement, contributing to a Roth account could save you money on taxes. By using Roth accounts, you can manage your withdrawals to stay in a lower tax bracket. This strategy is beneficial if you have both pre-tax (traditional) and Roth accounts, as it allows more control over your taxable income each year.

Example: If Sophie, a retiree, needs more income in a particular year but wants to avoid higher taxes, she can withdraw from her Roth IRA, which won’t add to her taxable income, keeping her in a lower tax bracket.

Protecting Against Long-Term Care Expenses

Roth accounts are ideal for planning against high long-term care costs in later life. Since these accounts aren’t required to make withdrawals at a set age, you can allow your investment to grow longer, providing more funds when needed for health-related expenses.

Example: George is 65 and decides to allocate his Roth IRA funds specifically for potential long-term care needs. He invests in stocks within the Roth IRA, aiming for growth, knowing he won’t need to tap into these funds until much later.

Leaving A Legacy For Heirs

If you plan to leave money to your children or grandchildren, Roth accounts can be advantageous since the money, including earnings, can be withdrawn tax-free by your heirs. Additionally, these accounts bypass the often lengthy and costly probate process.

Example: Lisa wants to leave a financial gift to her grandson without the burden of taxes or probate. She designates him as a beneficiary on her Roth IRA, ensuring he receives the maximum benefit from her savings.

More Rules

• Contribution Limits: The maximum contribution to a Roth IRA is $7,000 if you’re under 50 and $8,000 if you’re 50 or older for the year 2024. Roth 401k has higher limits.
• Income Limits: Your ability to contribute to a Roth IRA phases out at higher income levels. For single filers, the limit starts reducing from $146,000 and stops at $161,000, where you can no longer contribute.
• Age and Compensation: There are no age restrictions for contributing to a Roth, but you must have earned income.

Remember, when planning your retirement contributions and strategies, it’s helpful to consult with a tax accountant or financial advisor to personalize your approach.