Roth IRA: Why It’s a Must for Every American!

Janice Campbell, at 72 years old, isn’t the typical Roth IRA investor. Roth accounts, which require after-tax contributions, are usually recommended for younger workers just starting their careers. The idea is to pay taxes now at a lower rate, allowing the investment to grow tax-free until retirement, when withdrawals are also tax-free.

But for Campbell, a retired tech worker who enjoys hiking around her Arizona home, concerns about potential future health issues and the costs of long-term care have prompted her to reconsider her investment strategy. “I think it’s important at our age not to put the burden on our children or grandchildren,” she says. Following her financial advisor’s advice, Campbell is converting a portion of her retirement savings into a Roth IRA.

This decision allows her to let the money grow without worrying about taxes later. “Chances are, I won’t need that money until later, and it can just grow,” she explains. Financial advisors, like Andrea Clark from Table Financial Planning in Fountain Hills, Arizona, agree that Roth accounts offer significant tax and estate-planning benefits for older adults.

Clark highlights the advantage of having a tax-free bucket of funds for large or unexpected expenses. For example, withdrawing money from a traditional 401(k), which is taxed as ordinary income, could push someone into a higher tax bracket, especially if they need to cover costly nursing home bills. Such a scenario could also lead to increased Medicare premiums, adding to the financial strain.

Given the current low-income tax rates, experts believe now is a prime time to consider converting traditional retirement accounts to Roth IRAs. These rates are set to increase after 2025 unless Congress takes action, making the next few years particularly advantageous for such conversions. Additionally, Roth accounts can protect heirs from hefty tax bills on inherited IRAs.

Matt Hylland, a partner at Arnold & Mote Wealth Management in Iowa, notes the uncertainty surrounding future tax rates. The Tax Cuts and Jobs Act of 2017 temporarily reduced individual tax rates, but those cuts are slated to expire at the end of next year. Without legislative intervention, the marginal tax rate for the highest earners could jump back to around 40%.

Jeremy Eppley, founder of Silverstone Financial in Maryland, adds that the national debt might force the government to raise taxes in the future. “It’s unlikely that, long-term, taxes will remain this low,” he says. This concern is particularly relevant for retirees or soon-to-be retirees who have large balances in traditional, tax-deferred accounts. When these individuals begin taking required minimum distributions at age 72 (or 73 for those turning 72 or younger in 2024), they could find themselves in unexpectedly high tax brackets, especially if they have other taxable income, like pensions.

John Moore, a 65-year-old retired engineer from Iowa, shares how he overlooked the tax implications of his retirement savings. “I knew if I was going to have a hope at retirement, I was going to have to save like crazy,” Moore says, recalling how the Great Recession affected his savings. However, he didn’t initially consider the impact of required minimum distributions on his taxable income. After reviewing the math, Moore is now in the process of converting some of his traditional retirement savings to a Roth IRA.

Hylland notes that this is a common oversight among new retirees. Many enjoy lower taxes in the early years of retirement, only to face higher rates later on due to required distributions.

For those still working, Roth contributions may be available through employer 401(k) plans, which, according to Vanguard’s 2024 report, are offered by 82% of employers. Unlike Roth IRAs, Roth 401(k)s have no income restrictions, making them accessible to all eligible workers. High-income earners can also consider Roth conversions as an alternative.

Individuals working part-time or in the early years of retirement, especially if they aren’t yet drawing Social Security or retirement account withdrawals, are well-positioned for Roth conversions. With lower taxable income, they remain in a lower tax bracket, making conversions more manageable.

Converting funds to a Roth account counts as income and is taxed at ordinary rates. Advisors aim to “fill up” tax brackets without pushing clients into higher ones. For instance, a single filer earning $150,000 in 2024 could convert up to $41,950 from a traditional account to a Roth without exceeding the 24% tax bracket threshold.

However, converting too much in a given year can have other consequences, such as losing tax credits or affecting eligibility for income-based programs. For older retirees, it could mean higher Medicare premiums.

Advisors recommend starting Roth conversions early to avoid these issues. “If we have enough of a runway, it can be a small amount per year,” says Luis Rosa, founder of Build a Better Financial Future in Las Vegas. Rosa emphasizes that a five-year or longer timeframe is ideal, providing flexibility in managing taxes.

Ultimately, the choice comes down to whether to pay taxes on the “seed or the harvest,” as Rosa puts it. The key is to plan early, understand the potential tax implications, and make informed decisions that align with long-term financial goals.