Roth IRA: Income Tax Free Withdrawals

With a traditional IRA, you don't pay taxes on the money you deposit, but withdrawals are taxed as ordinary income. With a Roth IRA, you deposit money on which you've already paid taxes and Roth IRA withdrawals will eventually be a tax-free source of retirement income.

A Roth IRA conversion means you move your money from the traditional IRA retirement account to the Roth IRA, setting up tax-free retirement income. 

Many people put money in a traditional IRA or401(k), defer taxes and plan to take distributions in retirement while in a lower tax bracket, but not everyone pays a lower tax rate in retirement. Clients many times end up in a higher tax bracket. Between Social Security, pensions and required minimum distributions, people often remain in the same tax bracket they were in before they retired or are pushed into a higher one.

Not Required to Take Required Minimum Distributions

One significant advantage of a Roth IRA is that you do not have Required Minimum Distributions. This means you are not forced to take out a certain amount each year and these funds can remain in the Roth IRA, earning tax-free money. 

Other types of retirement accounts, including Traditional IRAs and most 401(k)s, do have Required Minimum Distributions.

Reduced Taxes for Heirs

The Secure Act, which took effect in 2020, requires many traditional IRA beneficiaries to withdraw all the money in the account within 10 years and pay the resulting tax bill. 

Under the old rules, a 45-year-old who inherited a $500,000 IRA from a parent could take small distributions over his lifetime. The Secure Act requires that all distributions be taken within a decade.  When they have to take the entire amount over 10 years, $50,000 a year likely puts them in a higher tax bracket.

If a Roth IRA is part of your estate, your beneficiaries will then receive the Roth IRA proceeds without having to worry about the taxes.