As you aim to build a balanced retirement income stream for yourself, it’s worth considering how a Roth Individual Retirement Account (IRA) or a Roth 401(k) can compliment a traditional IRA or 401(k) account. That’s because, unlike a traditional tax-deferred retirement account, a Roth account provides tax-free income when you retire.
It’s important to note that IRAs are self-directed (you can set them up through a financial institution), while 401(k) plans are available through an employer, who may match your contributions up to a certain percentage.
Here are seven things to know about Roth accounts:
- Your contributions are taxed when they go in, so you get tax-free withdrawals in retirement. You can retrieve your contributions at any time, regardless of age, but you must be 59 ½ or older and have had a Roth open for at least five years to tap into your earnings without facing taxes or penalties.
- You have more flexibility to use Roth funds for things like a first-time home purchase or college tuition.
- You can use it to bridge any income gap after you retire and before you start to draw Social Security or withdraw money from your traditional retirement account.
- Your Roth has no minimum distribution requirements and no withdrawals are required until you die. Your spouse can inherit the account and pass it along to your heirs. (In comparison, you must begin withdrawing from a traditional IRA at age 70 ½.)
- You can convert a traditional IRA into a Roth. This could make sense for you if you expect your tax rate to be the same or higher in the future. But it might not, if you expect your tax rate to be lower. This is a great topic to discuss with your accountant, because a conversion could have other tax and financial implications.
- You can contribute to both Roth and traditional IRAs, but the total cannot exceed the annual per person limit. The 2018 IRA contribution limit is $5,500. Savers age 50 and up are allowed an annual $1,000 catch-up contribution, for a total of $6,500.
- You have until the year’s tax deadline to make IRA contributions. So for 2018, you can contribute to your IRA accounts from Jan. 1, 2018 through April 15, 2019.