Deciding Whether to Save in a Pretax or Roth Account retirement It’s gotten a little easier — at least for people 50 and older.
t row value That’s how late-career employees want to leave money to heirs, deciding how much tax-deferred savings to justify the switch to Roth contributions. When an individual’s or couple’s assets exceed those limits, switching to a Roth can result in a similar Great legacy for his successorsThe company found
A financial advisor can help you decide between Roth and pretax contributions. Find an Advisor Today,
Roger Young, a certified financial planner and director of thought leadership at T. Rowe Price, writes, “Choosing a Roth can result in lower taxes in retirement for the account holder as well as the beneficiaries, which in many cases more than makes up for the higher working-year taxes.” It is possible.” , “This could result in beneficiaries’ after-tax value of money increasing by tens of thousands of dollars, without sacrificing spending in retirement.”
Roth vs Pretax Contributions
The difference between pretax and Roth contributions comes down to how the money is taxed.
money that is saved in a traditional ira Or 401(k) Tax-deferred, meaning the money is not taxed when it goes into the account. As a result, making contributions to a tax-deferred account reduces your taxable income for the year. However, when you start making withdrawals from the account, you’ll owe income tax on that money — and any interest that’s generated.
Roth contributions work in the opposite way. Money saved in a Roth IRA or Roth 401(k) is taxed before it goes into the account. But once it’s done, the money grows tax-free and can be withdrawn without any income tax at age 59.5. Roth IRAs are also not subject to required minimum distribution (RMDs), although RMDs apply to Roth 401(k)s.
As a result, people who believe they will be in a higher tax bracket in retirement often go the tax-deferred route, while higher-income workers who plan to leave the tax bracket in retirement stand to benefit from Roth contributions. are benefitted.
When to Consider Switching to Roth Contributions
But tax brackets Contribution isn’t the only thing to consider when choosing between Roth and pretax contributions. T. Rowe Price finds Roth savings may be more valuable in a estate planningBecause they can lead to large after-tax inheritances for heirs.
Late-career workers who already have a healthy amount of tax-deferred savings may want to consider switching to Roth contributions if they plan to leave assets to non-spouse beneficiaries. To help you decide between Roth and pretax options, the financial services firm has identified “break-even” asset levels for people aged 50, 55 and 60 at various income levels. Once an individual’s or married couple’s assets exceed these break-even points, Roth contributions become preferable to those who wish to pass on assets to heirs. Before those limits are exceeded, however, the pretax and Roth strategies produce similar results, t. Rowe Price was found.
Married couples who file their taxes jointly benefit from the switch over Roth contributions when they have approximately:
4X to 5X their annual income saved at age 50
5X to 6X their annual income saved at age 55
6.5X to 7.5X their annual income saved at 60
For example, T. Rowe Price found that switching to Roth contributions makes sense for a 60-year-old married couple earning $275,000 per year when saving more than seven times their income ($1.93 million). . A 55-year-old couple earning the same amount per year would benefit from switching to Roth contributions once their assets exceed 5-times their income ($1.51 million). Meanwhile, a 50-year-old couple earning $225,000 should consider Roth contributions when their savings exceed four times their income ($900,000).
Switching to Roth contributions is generally beneficial single tax filers with approx:
4X to 5X their annual income saved at age 50
5X to 7X their annual income saved by age 55
6X to 9X their annual income saved at age 60
For example, a 55-year-old single filer who makes $175,000 per year and wants to leave as much money as possible to an heir should switch to Roth contributions when their pretax savings reach $1.05 million or more than six times their income. Are. Similarly, a 50-year-old single who makes $125,000 per year would benefit from switching to Roth contributions when he has more than $562,500 in pre-tax savings (4.5x his income).
The decision between making pretax or Roth contributions often depends on your estimated tax bracket in retirement. However, t. Rowe Price says late-career workers who may not need their RMDs to cover retirement expenses should consider Roth contributions because they can create better after-tax benefits for their heirs. Are. The company calculates break-even asset levels to guide your decisions.
Roth IRA Tips
A financial advisor can help you get started saving in a Roth IRA. Finding a Financial Advisor Shouldn’t be difficult. SmartAsset’s Free Tool Matches you with three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. If you are ready to find an advisor who can help you achieve your financial goals, get started now.
SAFE Act of 2019 Making Roth IRAs even more valuable within estate plans. A provision in the law requires that people who inherit retirement accounts reduce balances. within 10 years of inheriting them, instead of spreading those distributions out according to their life expectancies. Since Roth distributions are not subject to income tax, this provision will not affect those who inherit Roth IRAs.
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