Need-To-Know Tips About Roth Retirement Accounts

As you aim to build a balanced retirement income stream for yourself, it’s worth considering how a Roth Individual Retirement Account (IRA) or a Roth 401(k) can complement a traditional IRA or 401(k) account. Unlike a traditional tax-deferred retirement account, a Roth account provides tax-free income when you retire.

It’s important to note that IRAs are self-directed (you can set them up through a financial institution), while 401(k) plans are available through an employer, who may match your contributions up to a certain percentage.

Here are seven things to know about Roth accounts:

1. You contribute already-taxed earned income into a Roth account, so you get tax-free withdrawals in retirement. You can retrieve your contributions at any time, regardless of age, but you must be 59 ½ or older and have had a Roth open for at least five years to tap into your earnings without facing taxes or penalties.
   
   
2. You have more flexibility to use Roth funds for things like a first-time home purchase or college tuition.
   
   
3. You can use it to bridge any income gap after you retire and before you start to draw Social Security or withdraw money from your traditional retirement account.
   
   
4. Your Roth has no minimum distribution requirements and no withdrawals are required until after your death. Your spouse can inherit the account and pass it along to your heirs. (In comparison, you must begin withdrawing from a traditional IRA at age 70 ½ or age 72, depending on your date of birth.)
   
   
5. You can convert a traditional IRA into a Roth. This could make sense for you if you expect your tax rate to be the same or higher in the future. But it might not, if you expect your tax rate to be lower. This is a great topic to discuss with your accountant, because a conversion could have other tax and financial implications.
   
   
6. You can contribute to both Roth and traditional IRAs, but the total cannot exceed the annual per person limit.
   For 2023, the annual IRA contribution limit is $6,500. Savers who are age 50 and up are allowed an annual $1,000 catch-up contribution, for a total of $7,500. For 2024, that increases to $7,000 ($8,000 if you are 50 or older, including the catch-up contribution). All new limits go into effect Jan. 1, 2024. For details, visit irs.gov.
   
7. You have until the year’s tax deadline to make IRA contributions. For 2023, you can contribute to your IRA accounts through April 15, 2024. For 2024, you have until tax day 2025.
   

The government has annual income limits on how much you can earn and still contribute to your IRA. Additionally, a Saver’s Credit is available to people earning below certain adjusted gross income levels so be sure to visit with your accountant or tax advisor if you have questions. To learn how a traditional IRA can help you prepare for retirement, read our blog, Seven Things to Know About Traditional IRAs.