A Roth IRA can offer both income and estate tax benefits. However, it’s important to weigh the benefits of each IRA type. Even though converting to a Roth IRA may present a golden opportunity for many taxpayers, it’s not right for everyone.

What are the differences between a traditional vs. a Roth IRA?

The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your tax bill now. You pay taxes on the funds when you make withdrawals.

As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.

In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements).

This can be advantageous if you expect to be in a higher tax bracket in retirement or that tax rates will increase.

Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of the Social Security benefits you receive in retirement. 

Any additional Roth advantages?

A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. Your contributions can continue after you reach age 70½ as long as you’re earning income, and the entire balance can remain in the account until your death. In contrast, beginning with the year you reach age 70½, you can’t contribute to a traditional IRA — even if you do have earned income. Further, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than the April 1 after you reach age 70½. 

Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account. Further, the distributions they receive from the Roth IRA won’t be subject to income tax.

What are the Roth IRA contribution limits?

The amount you can contribute to a Roth IRA is subject to the same annual limits that apply to traditional IRAs — for 2017, $5,500 ($6,500 if you’re age 50 or older) — and is reduced by the amount you contribute to a traditional IRA in the same year. Also, as with a traditional IRA, you can’t make Roth IRA contributions in excess of your earned income for the year.

The IRS further limits your Roth IRA contributions if your income tops a certain level. For 2017, a taxpayer can contribute the full amount allowed if his or her modified adjusted gross income (MAGI) doesn’t exceed $186,000 (married filing jointly) or $118,000 (single or head of household). No contributions are allowed when a taxpayer’s MAGI hits $196,000 or $133,000, respectively.

Keep all options open

As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA is one of them, but consult with your tax advisor to determine whether it’s a logical choice.

© 2017

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