October 14th, 2024 | 2:44 PM MST
Written By: Teresa Milner | Senior Wealth Management Advisor with Pearl Capital Management

When it comes to retirement planning, a common option discussed is the Roth IRA.  Among other benefits, a Roth IRA offers significant tax advantages – depending on your individual circumstances. There are several factors to consider when deciding whether a Roth IRA is a good choice for you. Let’s explore some of the key considerations:

1. How Does a Roth IRA Work?
   • • The core structure of a Roth is important to understand. Contributions are made with after-tax dollars, meaning you don’t get a tax deduction in the year you contribute. However, when the funds are withdrawn for retirement, both the contributions and the investment growth are tax-free (if you meet certain conditions).
2. Consider Your Current and Future Tax Brackets
   • • Your tax situation is a major factor. In retirement, will your tax rate be higher or lower than your current rate?
     • Know what your current tax rate is. Then determine whether you expect your tax rate to be higher or lower when you retire.
3. Flexibility With Your Retirement Savings
   • • Unlike traditional IRAs, with a Roth IRA, you are NOT required to take Required Minimum Distributions. You can let your funds continue to grow tax-free as long as you want.
     • Contributions (but not earnings) can be withdrawn from your Roth IRA without penalty.
4. Do You Qualify to Contribute?
   • • There are income limits that affect your eligibility to contribute. These typically change on an annual basis.
     • If your income exceeds the thresholds, you may still be able to contribute through a backdoor Roth IRA.
5. Consider Your Age and Time Until Retirement
   • • The longer you have until retirement, the more time you’ll have for your Roth IRA investments to grow tax-free. This is a great benefit for young investors who just started their career and expect their earnings to increase over time.
     • If you’re near retirement, consider calculating whether the tax-free withdrawals will provide more benefit than the tax deductions of a traditional IRA.
6. Valuable Estate Planning Considerations
   • • Roth IRAs are inherited tax-free. Thus, they are an efficient vehicle to pass wealth to heirs without saddling them with large tax bills.  
     • Since there are no Required Minimum Distributions with a Roth IRA you can pass on a larger portion of your savings.

Retirement planning is not a one-size-fits-all exercise that prepares you for a secure, comfortable future. Consider consulting with a financial planner to discuss your options and ensure you’re choosing the right tools. A Roth IRA can be an excellent retirement savings tool, but it isn’t for everyone.

Disclaimer: The regulations surrounding Roth IRAs are subject to change. The information in this blog is accurate as of October 14, 2024 and may not reflect future changes in law or policy. Please consult with a financial professional or refer to the latest IRS guidelines for the most current information.

This article was written by Teresa Milner, CDFA a Certified Divorce Financial Analyst who specializes in helping women navigate through divorce and into the next financial chapter of life. For more information, email her at CDFA@thepearlcapital.com.

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