Roth IRAs Are Surprisingly Flexible Retirement Planning Tools

Many investors wonder whether they should put retirement savings into a traditional IRA or a Roth IRA. The following facts about Roth IRAs may surprise you and influence your decision.

Can Roth IRA Contributions be Used in an Emergency? Traditional vs. Roth IRA

The goal of an IRA, of course, is to save for retirement. Nobody wants to withdraw money from their retirement savings, but it’s nice to know you have access to that money in an emergency. Since Roth IRA contributions are not deductible, they can be withdrawn for any reason, at any time, without penalties or taxes.

It’s important to note, however, that this flexibility does not apply to funds that were converted to a Roth IRA or investment gains. For example, if you put $3,000 into a Roth IRA and it grew to $4,000 over time, you can only withdraw the initial $3,000 without penalty.

Do Roth IRAs have Required Minimum Distributions?

Because Roth IRAs do not require you to withdraw money at a certain age, you don’t have to worry about paying a significant amount in taxes after making a required minimum distribution. While non-spouse heirs must take required distributions from inherited Roth IRAs, at least they will be tax-free.

Are You Allowed to Roll After-Tax 401(k) contributions into a Roth IRA?

Many employer retirement plans permit you to make after-tax contributions. At retirement, these after-tax contributions can be rolled into a Roth IRA.

While investment gains on the after-tax contributions cannot go into the Roth IRA, the original contributions can.

Will Your Employer’s Retirement Plan Allow for Roth IRA Contributions?

Many 401(k) plans now allow Roth IRA contributions. These plans are known as Designated Roth Accounts (DRAs). Some DRAs allow you to contribute to both a 401(k) and a Roth IRA while others make you choose one or the other.


Can You Benefit from Contributing to Both a Roth IRA and a Traditional IRA?

If your Modified Adjusted Gross Income (MAGI) is within Roth IRA limits, which are currently $137,000 for a single filer and $203,000 for a couple filing jointly, you can contribute to both a Roth IRA and a traditional IRA. Your contributions to the traditional IRA will be tax-deductible, of course, while your Roth IRA contributions will not be.

Why might you want to do this? It allows you to reduce taxable income now using the traditional IRA and have access to tax-free benefits from the Roth IRA in retirement. Such an approach is particularly good for self-employed people who are highly committed to saving for retirement.

Are You Allowed to make a Spousal Roth IRA Contribution?

Even if your spouse does not earn income, you might be able to make a contribution to your Roth IRA on his or her behalf. This will allow couples to double the number of contributions they can make to a Roth IRA each year.

Is a Roth IRA right for you? As we mentioned earlier, you must meet the MAGI requirement to be eligible for a Roth IRA. Key factors to consider include:

  • Your income
  • Your tax rate now
  • and your expected tax rate in retirement.

If your tax rate during retirement will be the same or higher than it is now — which is frequently the case for people with large IRAs or 401(k)s — a Roth IRA may be a good choice.

It bears mentioning that Roth conversions may be complicated and mistakes could be costly. It pays to speak with a professional about your particular retirement objectives.

Get the Expert Estate Planning Advice You Need

Clifford M. Cohen has more than 35 years of experience and dedicates his practice to guiding aging individuals in the Maryland and D.C. area through all facets of estate planning law. Contact us today at 202-895-2799 for a free case evaluation.