The Roth Advantage Part 1
Would you rather have a small tax deduction this year or tax-free retirement money in the future?
The unique advantages of a Roth IRA make it one of the most powerful ways to save for retirement and beyond, especially if you can earmark it for funds you don’t plan to spend anytime soon. Time is one of the biggest factors impacting how you should invest. The more time you have, the more advantageous the Roth IRA can be.
For Millennials and Gen Z, there are numerous advantages to opening a Roth IRA. Assuming your income does not exceed the limit[i], for many*[i] the Roth IRA is the one of the best places to start retirement planning. Though you can’t take deductions when contributing to a Roth IRA, future distributions are tax free if they meet certain requirements[ii]. This gives you a unique opportunity to pay a potentially lower tax rate now, without the gains being taxed in the future!
The Roth IRA was initially intended for those who are in lower tax brackets, and whose income is expected to grow. The lower your taxes are now, the smaller the impact on your tax bill if your contributions or conversions are taxable. You may never be in a tax bracket this low again, especially given the historically low brackets we are experiencing through 2025 from the TCJA! It still makes great sense for those people but Roth Conversions have only been around since 2010 and with changes from the SECURE Act and SECURE 2.0 they have become more interesting planning tools.
With a Traditional IRA, though contributions are deductible now, all the distributions count as income for tax purposes. This means that 100% of distributions from a Traditional IRA will be taxed at your highest marginal tax bracket each year, and that’s whatever the future tax rate is which is unkown! With current tax laws, your ordinary income is taxed at a higher rate than long term capital gains[iii]. Since all distributions from a Traditional IRA count as ordinary income, they would have a larger tax burden than selling investments outside of retirements accounts. Qualified distributions from a Roth IRA are tax free[iv]!
You are never required to take distributions from a Roth IRA! With a Traditional IRA, when you turn 73[v] you will need to start taking distributions. You can’t avoid paying those taxes forever, the Roth will never force the original owner to take distributions and an inheriting owner now could potentially get up to another 10 years of growth before the tax free distribution of the entire account.
There are many other unique and advantageous properties that Roth IRA’s offer. This is part 1 in a series of articles I will be writing over the next few months outlining some of the other differences and potential benefits of Roth IRAs. Keep your eyes open for Part 2 with important information for first time homebuyers and those approaching retirement.
Remember, it’s never too early to start thinking about retirement. The earlier you start the more time you have for growth. You work hard for your money, we work hard so your money can work for you.
[iv]A Roth IRA distribution is qualified if you’ve had the account for at least five years and/or the distribution is made after you’ve reached age 59½, because of your total and permanent disability, in the event of your death or for first-time homebuyer expenses. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings
[i] This assumes that your employer does not offer 401k or similar account with a match. Maxing the match first could be a better move before funding the Roth if you have a match available.