Roth Options for Your Retirement Plan

Tax-advantaged retirement plans can help you build and preserve your nest egg — but only if you contribute as much as possible, carefully consider your traditional vs. Roth options, and are tax-smart when making withdrawals.

DS+B Team December 12, 2019

A potential downside of tax-deferred saving is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, however, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income:

1. Roth IRAs.
In addition to tax-free distributions, an important benefit is that Roth IRAs can provide estate planning advantages: Unlike other retirement plans, Roth IRAs don’t require you to take distributions during your lifetime. So you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

If, for example, you name your child as the beneficiary, he or she will be required to start taking distributions upon inheriting the Roth IRA. But the distributions will be tax-free and spread out over his or her lifetime, and funds remaining in the account can continue to grow tax-free for many years to come.

But Roth IRAs are subject to the same low annual contribution limit as traditional IRAs (see the Chart “Retirement plan contribution limits for 2019”) —>**this is attached as a screen shot. Link to original location is below ** and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year. It may be further limited based on your AGI.

2. Roth conversions.
If you have a traditional IRA, consider whether you might benefit from converting all or a portion of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth and take advantage of a Roth IRA’s estate planning benefits.

There’s no income-based limit on who can convert. But the converted amount is taxable in the year of the conversion.

Whether a conversion makes sense for you depends on a variety of factors, such as:

  • Your age,
  • Whether the conversion would push you into a higher income tax bracket or trigger the NIIT,
  • Whether you can afford to pay the tax on the conversion,
  • Your tax bracket now and expected tax bracket in retirement, and
  • Whether you’ll need the IRA funds in retirement.

Warning: Unlike before the TCJA went into effect, you can’t change your mind during the year and recharacterize a Roth conversion back to a traditional IRA.

3. “Back door” Roth IRAs.
If the income-based phaseout prevents you from making Roth IRA contributions and you don’t have a traditional IRA, consider setting up a traditional account and making a nondeductible contribution to it. You can then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.
4. Roth 401(k), Roth 403(b) and Roth 457 plans.
Employers may offer one of these in addition to the traditional, tax-deferred version. You may make some or all of your contributions to the Roth plan, but any employer match will be made to the traditional plan. No income-based phaseout applies, so even high-income taxpayers can contribute.