What to know about Roth IRAs and Roth conversions
We’ll help you understand the benefits Roth IRAs offer, your options for including a Roth IRA in your retirement savings strategy and what to consider when evaluating your needs.
Roth IRA Advantages
Tax-free IRA withdrawals
When you contribute money to a Roth account, you’ve already paid taxes on those dollars—that’s why Roth IRAs are often referred to as after-tax accounts. Because you’ve paid taxes on the money you contribute to a Roth IRA, you can withdraw your contributions at any time without taxes or penalties. In retirement, you can enjoy tax- free withdrawals of both your contributions and earnings from your Roth IRA (as long as you meet a few requirements1).
Tax-free IRA growth
Your money grows tax-free—meaning you don’t pay taxes on any earnings your contributions may make over time. With a traditional (or pre-tax) IRA,you often pay taxes on your contributions to the account and pay taxes on the earnings your investment generates as you withdraw money from the account in retirement.
Additionally, with a traditional IRA, you must begin taking required minimum distributions at age 72— this isn’t a requirement for Roth IRAs, meaning your money can stay invested in a retirement account and continue to grow tax-free.
Tax-free IRA inheritance
With the passing of the SECURE Act (effective January 1, 2020), certain beneficiaries of IRAs are now required to withdraw all the money from the IRA within 10 years2.This can create an unexpected hefty tax bill for your loved ones. If beneficiaries inherit a Roth IRA, they aren’t required to pay taxes on the money they withdraw, in most instances.
Thinking a Roth IRA might be a good option for you?
There’s a couple of ways you can include one in your retirement savings strategy.
Open a new Roth IRA
If you want to supplement your current retirement savings, like your 401(k), you can open and fund a Roth IRA from after-tax money (like money from your savings or checking account), as long as you don’t exceed the annual contribution and income limits.
Roth IRA conversion
Maybe you’ve already got savings in a pre-tax account, and you’re looking to put some of it into a Roth IRA to take advantage of those benefits. You can do what’s called a Roth conversion—moving money from a pre-tax account to a Roth IRA and paying taxes on it at the time of conversion.
This might be a good option if you expect to be in a higher tax bracket in retirement than you are now. Or, if you want to pass your money onto loved ones without creating a tax burden for them— converting some, or all, of your dollars to a Roth may be an option.
Rules for Roth IRA conversions and other considerations
Once you start evaluating how a Roth IRA might work for your retirement goals, taxes start to become a significant consideration. Working with your tax professional will help you determine:
- The best times and ways to move money between retirement accounts; including between different companies, especially if you are consolidating accounts
- When and how to pay taxes on the money in your retirement accounts
- Which IRS rules may impact your strategy
It may be a good idea to talk with your financial advisor or tax professional about if participating in a Roth IRA, no matter how you do it, makes sense for you today—or in the future years.
1 Your account must be open for 5 years and you must be over age 59½ (or meet certain other exceptions) to be eligible for qualified tax-free withdrawals of earnings.
2 There are exceptions to these new rules for certain eligible designated beneficiaries and non-individual beneficiaries
This document is intended to be educational in nature and is not intended to be taken as a recommendation.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC. Principal Life and Principal Securities are members of Principal Financial Group®, Des Moines, IA 50392.