Besides being an essential retirement savings option, the Roth IRA (and its cousin the Roth 401(k)) may be a potent tax planning tool. The real-world tax ramifications of using a Roth IRA or Roth 401(k) in retirement may be the finest method to highlight the benefits of these accounts.
These examples won’t necessarily mirror your life, but they’ll show you how a Roth IRA operates in practice. They may also advise you on the tax consequences of contributing to a Roth IRA or Roth 401(k) in your working years and then withdrawing and spending the money in retirement.
Insights about the potential of a Roth IRA or Roth 401(k) to help you save for retirement are provided in the hopes that they would encourage you to investigate the topic further. The counselors at GLP Financial Group are always ready to have in-depth conversations about your unique circumstance and address any concerns you may have.
The Time to Pay Taxes Is…
Withdrawals from a Roth IRA or Roth 401(k) are not subject to taxes if the account holder is at least 59 1/2 years old and has held the account for at least five years. However, contributions to these accounts are not deductible for tax purposes. Contributions to a typical IRA or 401(k) are tax-deductible, whereas withdrawals are fully taxable as income.
Furthermore, a person’s ability to contribute to a Roth IRA is limited by their Modified Adjusted Gross Income (MAGI). This is the amount that will be used to calculate your adjusted gross income for tax purposes. The ability to make Roth IRA contributions begins to taper off when your MAGI hits the lower end of these income ranges and disappears entirely when you transcend the high end, as shown in the table below.
Is There Any Tax Advantage To Contributing To A Roth IRA Or Roth 401(k)?
Making a Roth contribution is not necessarily a good idea even if your MAGI is high enough to qualify you to do so. Noting that contributions to Roth IRAs and Roth 401(k)s are not tax deductible, the following chart, based on tax rates for 2022, will help you estimate the tax “cost” of choosing to make Roth contributions rather than standard tax-deductible IRA or 401(k) contributions.
