Self-proclaimed experts can make your head spin with their bragging about how great their investments and retirement accounts are. There’s one in every crowd!
You may encounter them at work or at family gatherings. These are people who insist on telling you how smart they are about avoiding taxes through retirement accounts. But before you listen to another earful, let’s look at the facts first.
It may be, says The Central Penn Business Journal that this person is talking about their Roth IRA savings techniques and how beneficial its tax-free savings are for their estate planning. The article, “There’s more than one way to save in a Roth,” explains that what you save in a Roth IRA represents post-tax savings. It grows tax-deferred, and then in retirement, the growth that’s never been taxed can be distributed tax-free.
For those savers who anticipate being in a higher income tax bracket in retirement than they are now, the benefits can be significant. Even for those savers who think their tax rate today is higher, there are still worthwhile benefits to the Roth IRA.
Roth IRAs don’t require “minimum distributions” after age 70 ½ like traditional IRAs. Roths can also be passed on, just like traditional IRAs, in a tax-efficient way to beneficiaries. They supersede a will and avoid the probate process. This makes a Roth a helpful estate planning tools for transferring wealth. The savings made into Roth IRAs can be accessed five years after the initiation of the Roth—even if the owner is under 59½. Early distributions from the Roth may be free of penalties and double taxation, if they represent the investor’s savings into it.
Most 401(k) plans now come with traditional and Roth options. That means the best part about the Roth savings option is that it comes with nearly all of the benefits of the Roth IRA and a few more. 401(k) plans allow for significant annual participant savings ($18,000 or $24,000 for those over 50 years old in 2017). If the participant decides to save all of that in the Roth side of the plan, he can do so regardless of his family’s income, with a $24,000 limit in 2017 into a Roth 401(k) for those 50 years old or older, and the Roth IRA income limits don’t apply.
It is important to remember that if you decide to leave money in a Roth 401(k) after you are 70½, you will be required to make minimum distributions as long as you are alive. What most investors do is pretty simple; they roll their Roth 401(k)s into a Roth IRA upon retirement.
Reference: Central Penn Business Journal (July 14, 2017) “There’s more than one way to save in a Roth.”