How Do Roth IRAs Protect You?

October 27th, 2021 | Luke Roth

As National Retirement Security Month draws to a close, Myriad Advisor Solutions is taking a closer look at retirement savings accounts. By now, you are likely aware of the two most common kinds of retirement savings funds – Traditional and Roth. While both types of accounts have advantages, right now might be a great time to talk with your clients about setting up or converting to a Roth 401(k) or Roth IRA.

Traditional IRAs allow savers to invest pre-tax dollars in the market today. After age 59.5, the retiree can withdrawal their money and pay taxes on the funds at that time. The idea is that people will enter a lower tax bracket as they retire, so deferring the taxes until then will cost less than paying them while they are still actively earning income and therefor in a higher tax bracket. Roth IRAs are set up similarly, except savers are investing after-tax dollars instead of pre-tax. This, in turn, makes their retirement distributions tax-free.

The critical question to ask your clients becomes, “Do you think your personal tax liability will increase or decrease as time goes on?” Regardless of their income level and tax bracket, many Americans believe that tax liabilities will only increase as time goes on. As well, more Americans than ever are delaying retirement well past 59.5 or simply working less without fully retiring. With a Traditional IRA, you can still access your money past the age of 59.5 but will pay taxes on it based on your income level. With a Roth IRA, you can access your money past the age of 59.5 without concern for your tax bracket because the taxes have already been paid!

Starting a brand-new Roth IRA or 401(k) isn’t the only way to take advantage, clients can also utilize a Roth Conversion of a Traditional IRA into a Roth IRA. Have any of your clients expressed concern about possible tax hikes under the current administration? They can ‘lock in’ their current tax rates by converting all – or just a portion – of their Traditional account into a Roth account.

The current administration wants to raise the top individual rate from 39.6% from 37%, which would affect individuals with income above $523,601 and married couples with income above $628,301. That makes RIGHT NOW a crucial time to check in with your high net worth clients!

Please consult with your tax professional before making any decisions.