As you head into your last decade before retirement, the pressure to save heats up. Where you put your investment dollars now matters, and a Roth individual retirement accountcould be a great place to save.
“When you retire, you’ll have what we refer to as your retirement toolbox,” says Lou Cannataro, a partner at Cannataro Park Avenue Financial in New York. Your 401(k) may be your hammer but “you know that retirement will eventually call for a screwdriver,” and that’s where a Roth IRA comes in handy.
It’s not about what you make; it’s about what you keep, says Tony Fabrizio, senior vice president at People’s United Advisors, in Bridgeport, Connecticut. A Roth IRA can be useful for managing taxes in retirement, thanks to the Roth’s tax-free distributions. “The less you pay in taxes, the longer your retirement savings will last,” Fabrizio says.
Tax reform boosts a Roth’s benefits.Recent tax reform makes Roth IRAs more attractive because of the resulting reduction in tax brackets, says John Piershale, wealth advisor at Piershale Financial Group in Crystal Lake, Illinois. That’s beneficial if you’re in your peak earning years now, “because when you put money into a Roth IRA, you pay the tax first.”
In many cases a Roth IRA makes sense to use if you’re already benefiting from tax reform. “It’s a bit of a game-changer, and it makes sense to pay lower tax rates now, especially if you’re concerned about tax rates increasing at the end of 2025,” says Brooke Hawley, retirement plan advisor at RBC Wealth Management in Seattle.
The 2025 deadline still leaves plenty of time to take advantage of lower tax brackets and max out after-tax contributions to a Roth IRA. If your income is above the threshold for contributing to a Roth IRA, Cannataro says you can still enjoy tax-advantaged savings with a Roth 401(k) if your employer offers one.
A conversion is all about timing. Tax reform also makes Roth IRA conversions more appealing if you want to avoid the required minimum distributions associated with a traditional IRA.
“It may be wise to do Roth IRA conversions now if the funds being converted will be taxed at a lower rate than would otherwise apply at age 70½ when RMDs begin,” says Patrick Meyer, director of wealth management client services at Unified Trust Co. in Lexington, Kentucky.
The decision also depends on how much of your traditional IRA pre-tax dollars you plan to convert. While converting to a Roth allows you to withdraw those funds in retirement tax-free, you still must pay tax on the money at the time of the conversion, which could temporarily increase your tax liability. “If you don’t have additional deductions or offsets to lower your taxable income, the Roth IRA conversion loses some of its luster,” Meyer says.
There is a way to sidestep a huge tax bill if a conversion puts you in a higher tax bracket. “You might want to consider converting smaller amounts over a longer period,” says Chris Scalese, founder and president of Fortune Financial Group in Dunmore, Pennsylvania.
One caveat about conversion: Tax reform eliminated recharacterizing Roth IRA conversions. Recharacterization simply means switching Roth IRA assets back to traditional IRA assets after a conversion.
Typically, this is something investors might do if a market downturn occurs immediately after a conversion and they want to avoid paying higher taxes on assets that have since declined in value. At least through 2025, recharacterization isn’t an option, so there is some risk involved if the market declines.
If the market is already down and your traditional IRA balance has lost value, you should consider converting to a Roth because you would pay less tax on the conversion, says Chris Hershey, supervisor of financial planning at Wayne, Pennsylvania-based eMoney Advisor, a wealth planning platform for financial professionals.
The tax benefits continue in retirement. One of the Roth’s most significant benefits is you can manage your taxable income better during retirement, Hawley says. That’s important if you anticipate higher expenses in retirement because of a lifestyle change or a health condition.
Hawley says you want to defer or offset your tax liability using Roth accounts as much as you can. A “Roth acts as another source of income before having to use pre-tax dollars.”
If you’re still 10 years out from retirement, you should be working up a tentative spending plan, if you haven’t done so already. This can tell you if your current investments will generate enough income for retirement. If not, contributing to a Roth IRA in addition to your workplace plan can plug the gaps.
For retirees who spend less than expected in retirement, a Roth IRA yields yet another benefit in that it could leave them with a larger nest egg to pass on to their heirs.
“Someone who’s intent on leaving an inheritance for their children should know that an untapped Roth IRA can also be used as a tremendous estate planning and legacy tool,” says Craig Eissler, wealth advisor at Halbert Hargrove in Houston. “Heirs would enjoy tax-free treatment on those assets for life, rather than receiving an inherited IRA that would require taxable distributions, thus reducing their overall inheritance.”
A Roth IRA also works in your favor if you have to delay retirement. Piershale says if you’re continuing to work part-time past your target retirement date, you could benefit from contributing to a Roth to minimize tax liability once you begin making withdrawals.
And saving in a Roth in the last decade before retirement could pay off if you’re planning a major move in your later years.
“State taxes are often overlooked, but they can have a big impact,” Hershey says. “If you’re planning on retiring to a higher tax state, then a Roth conversion may make sense as those Roth distributions in retirement are both state and federally tax-free.”
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