In Summary
For the past 25+ years, Roth IRAs have offered substantial tax benefits to those who strategically incorporate them into their financial plans, and they remain advantageous, especially with the possibility of rising future income taxes. Common strategies used to incorporate Roth IRAs into comprehensive financial plans include: Roth Conversions, Backdoor Contributions, and Strategic Asset Location. Additionally, Mega Backdoor Roth IRA Contributions and purchasing private stock at low valuations are increasingly popular tools that can deliver Roth benefits but require careful navigation of complex rules.
Key Takeaways
- This insight provides high-level background on Traditional and Roth IRAs, changes to Roth accounts under the SECURE Act and the SECURE Act 2.0, and key considerations when evaluating benefits of a Roth IRA conversion and incorporating this account into financial plans.
- Roth IRAs use post-tax dollars for tax-free retirement withdrawals and have no lifetime required minimum distributions (RMDs), while Traditional IRAs generally use pre-tax dollars, reducing current taxable income but taxing withdrawals and requiring distributions in the future.
- In 2024, under the SECURE Act and the SECURE Act 2.0, lifetime RMDs are no longer required from Roth qualified employer plans and beneficiaries of 529 Plans can transfer money from their 529 Plans directly into a Roth IRA without tax consequences (if certain requirements are met).
- Converting a Traditional IRA to a Roth IRA can be highly beneficial, especially when income taxes are rising, the value of the traditional IRA assets are temporarily depressed due to market conditions, or the individual intends to pass on the converted amount to non-charitable beneficiaries.
- Individuals with substantial IRA balances or those strategically planning with Roth IRAs should be aware of potential tax law changes as proposals have been put forth to prohibit backdoor contributions for high-income taxpayers and implement special distribution rules for retirement account balances exceeding $10,000,000.