Written by Kevin Won, CFP®, and Neva Bradley, CFP®
We talked to successful individuals who are getting ready to retire from lengthy careers at large businesses at a recent Wealth Enhancement event. Many of the attendees had been saving hard for decades, frequently building up retirement balances of over $1,000,000 through regular payments to typical IRAs and 401(k) plans.
"I make too much money for a Roth" became a widespread worry as soon as Roth IRAs were brought up. Although this idea is widely held, it does not accurately represent how the current retirement regulations operate.
Early-career savers are not the only ones who can use a Roth IRA. When used properly within current laws, it can contribute significantly to tax diversification for many high-income households.
During the conversation, Kevin Won, CFP®, clarified that while some planning tactics may still be available under current tax regulations, many people believe they are not eligible for Roth strategies because of their income.
"Someone is sitting in the shade today because someone planted a tree a long time ago," Warren Buffett famously said. Similar terminology is frequently used to describe a Roth IRA, which entails paying taxes up front in exchange for the possibility of later tax-free eligible withdrawals.
Limits on Income and Roth Contributions
Direct contributions to Roth IRAs are subject to income restrictions set by the IRS. In 2024, direct contributions to a Roth IRA are prohibited for married couples filing jointly with income over $240,000 and individuals filing as single taxpayers with modified adjusted gross income exceeding $161,000.
Nevertheless, only direct contributions are subject to these income restrictions; Roth conversions are not. Regardless of income, people can transfer qualifying assets from a regular IRA to a Roth IRA under current tax regulations. Many times, this distinction is misinterpreted.
Making a nondeductible contribution to a traditional IRA and subsequently transferring the money to a Roth IRA is one popular strategy. This procedure, which is submitted to the IRS using Form 8606, is allowed by current tax law.
People should also know that the IRS uses a proportional tax calculation when conversions take place if they own other traditional IRAs with pre-tax assets. The amount of a conversion that is taxable may be impacted by this rule.
Retirement Tax Diversification
Traditional IRAs and 401(k) plans are two examples of tax-deferred accounts where many retirees keep the majority of their money. With the exception of any amount attributable to an after-tax basis, withdrawals from these accounts are typically taxed as ordinary income.
Roth IRAs operate in a different way. When it comes to managing cash flow and taxable income throughout retirement, qualified Roth IRA withdrawals can offer flexibility because they are not included in taxable income.
According to Neva Bradley, CFP®, having both taxable and tax-free retirement income sources available can provide choices for paying for significant needs without raising taxable income as traditional IRA withdrawals usually would.
Minimum Distributions Needed
The fact that account owners are exempt from taking withdrawals during their lifetime is another characteristic that sets Roth IRAs apart. This is not like standard IRAs, which have Required Minimum Distributions (RMDs starting at the age that the law now requires).
For those who are concerned with long-term planning or legacy considerations, Roth IRAs may allow assets to stay invested for a longer period of time because they do not demand lifetime distributions.
Future Generation Roth IRAs
Younger savers can also access Roth IRAs. A custodial Roth IRA may be opened on behalf of a minor who has earned income. Subject to annual limitations, contributions may be made up to the minor's earned income.
As long as the donation doesn't beyond the child's earned income, parents or grandparents may contribute the money. Younger people can start saving early while adhering to IRS contribution guidelines thanks to this system.
Current Law Regarding 529-to-Roth Transfers
Recent law permits, under certain restrictions, the transfer of some assets from a 529 school savings plan to the beneficiary's Roth IRA. There is a $35,000 lifetime transfer cap per beneficiary, and the 529 plan must have been in operation for at least 15 years.
Families with surplus school resources may find these transfers to be a viable alternative, but they are subject to additional constraints, such as annual Roth IRA contribution limits and other IRS regulations.
How The Retirement Group Can Assist
It takes careful coordination with current savings, tax regulations, and long-term objectives to understand how Roth methods fit into a larger retirement picture. Wealth Enhancement Group's Retirement Group assists retirees and corporate staff in assessing the potential long-term interactions between various retirement income streams.
You can chat with a member of The Retirement Group at (800) 900-5867 if you need assistance analyzing your retirement plan or understanding how Roth techniques could apply to your circumstances.
Disclosure: Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.