Roth IRA FAQ

We spend a lot of time answering your questions about Roth IRAs—and it’s time well spent.

Roth IRAs have some impressive tax advantages that make them appealing. Ideally this refresher is helpful, but let’s talk if you have questions that we don’t address.

What’s the difference between a Roth IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. and a traditional IRA? The difference comes down to taxes. Traditional IRAs and 401(k) contributions are made pretax—which means you sidestep the tax man (for now), thus lowering your annual taxable income in the year you make contributions. Your earnings grow tax-free, but withdrawals (after age 59½) are taxed as ordinary income. With a Roth IRA, you contribute money that has already been taxed as income. Once invested, your earnings compound tax-free, and there is no tax on qualified withdrawals taken after age 59½.

What is a mega backdoor Roth conversion? A mega backdoor Roth conversion allows you to roll over post-tax funds from a traditional 401(k) into a Roth in certain situations (note that not all 401(k) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn. allow mega backdoor conversions—we can help you determine if it’s permissible under your plan). If your retirement is many years down the road, the potential to compound your benefit for years (without having to pay taxes on withdrawals) could be advantageous—especially if you expect to be in a higher tax bracket in the future.

Should you convert from a traditional IRA to a Roth IRA? Here are some of the factors to consider when you’re deciding whether a Roth conversion makes sense for you.

• What tax bracket will you be in? Generally, if you have a low-income year (due to early retirement or another reason), it may make sense to convert.
• What’s your time frame? The longer you have before you need the money, the more sense it makes to convert to a Roth.
• What kind of legacy do you wish to leave? Based on their tax treatment, Roth IRAs are better assets to pass along to your heirs than traditional IRAs.

There’s more, so click here for our handy Roth conversion checklist.

So, should you choose a Roth over a traditional IRA? It really depends on your situation.

If you are a client, please reach out and we’d be more than happy to help.

If you are not a client, click here to book a meeting with one of our expert financial advisors now!