Tax Diversification Today Can Create More Flexibility Tomorrow.
Roth strategies are a powerful tool for long-term planning. Whether you’re saving for retirement, planning your estate, or managing future tax exposure, incorporating tax-free sources of income may enhance your overall strategy.
Planning for Retirement with Tax Flexibility in Mind
There are several ways Roth accounts can be incorporated into a financial plan, depending on your income level, retirement timeline, and long-term tax strategy. We work with clients to explore which types of Roth contributions or conversions may be appropriate for their situation.
Roth IRAs are individual retirement accounts funded with after-tax dollars. While contributions are subject to income limits, qualified withdrawals in retirement are tax-free, provided certain conditions are met. Roth IRAs also offer more control in retirement because they are not subject to required minimum distributions (RMDs) during the original account owner’s lifetime.
For those who have access to workplace retirement plans, Roth 401(k)s may offer a valuable opportunity. Like Roth IRAs, contributions are made with after-tax dollars, but these plans typically allow for much higher contribution limits and are not restricted by income. However, unlike Roth IRAs, Roth 401(k)s are subject to RMDs unless the funds are rolled over into a Roth IRA at retirement.
Some high-income earners may not be eligible to contribute directly to a Roth IRA. In these cases, we may explore a strategy known as a Backdoor Roth, which involves contributing to a non-deductible traditional IRA and then converting those funds to a Roth IRA. This can be a complex strategy with potential tax consequences, and it should be approached carefully with professional guidance.
Another strategy we may evaluate is a Roth conversion, where pre-tax assets in a traditional IRA or 401(k) are moved into a Roth IRA. Taxes are due in the year of conversion, but future qualified withdrawals are tax-free. Roth conversions can be particularly useful in years when income is lower than usual, during early retirement, or as part of a long-term estate planning strategy.
Each of these options requires thoughtful analysis. At Premier, we help you understand the advantages, trade-offs, and long-term implications of each strategy so you can make informed decisions within the context of your overall plan.
Download Your Free Rothification Guide
Our Investor’s Guide: Rothification & Your Retirement breaks down everything you need to know about Roth IRAs, Roth 401(k)s, conversions, and advanced tax strategies. Whether you’re just starting out, nearing retirement, or planning your legacy, this guide will help you decide when, and if a Roth strategy makes sense for you. Learn how to build tax advantaged income for the future, avoid common pitfalls, and make retirement planning decisions with confidence.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Consult your tax professional about eligibility to Roth and Traditional IRA contributions. Contributions and earnings in a Roth IRA can be withdrawn without paying taxes and penalties if the account owner is at least 59 ½ and has held their Roth IRA for at least five years.
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.