It’s no secret that I love Roth IRAs. Don’t tune out because you think you make too much money to have one!
Let me count the ways they’re great:
- No required minimum distribution at 70 ½, so you can leave the money to grow into old age if you wish.
- Grows tax free and you pay no taxes on any of it when you withdraw after 59 ½.
- Can always withdraw your contribution tax free.
- Can be used for medical emergencies and a $10,000 down payment on a first house (but don’t—leave it alone for retirement!)
- Your heirs will pay no taxes on withdrawal if any is left
- And the biggest benefit in my opinion—if you need a lump sum in retirement (dental implant, hearing aid, relocation expenses, buying into a continuous care community), you can withdraw it tax free. If you have to withdraw from a traditional IRA or 401K, you’re going to need to withdraw what you need + taxes on the withdrawal, so much less of your money is preserved going forward.
But, you make too much money, you say? Have you checked whether your 401K at work offers a Roth 401K option? Several clients in the past month have told me they don’t have a Roth 401K because they “make too much money”. It’s true that individual Roth IRAs have an income limit of $189,000 joint and $120,000 single, but the limit DOES NOT APPLY to workplace Roth 401ks. These Roth 401ks have exactly the same limits as your current plain vanilla 401k.
One of the biggest drawbacks of an individual Roth IRA is that you have a limited amount you can contribute each year: $5,500 with $1,000 additional after 50. But this is a relatively small amount, so many Roths never get large enough to fund a retirement. NOT SO with Roth 401ks, where you can deposit $18,500, with $6,000 extra after 50. Note: your employer’s match contribution will still go into the regular 401k.
Roth 401ks were relatively uncommon just a few years ago, but now many employers are offering the choice. It’s much underutilized. Sure, you lose the current tax deduction, but in the future, you should save far more in taxes on the appreciated amount. Check out this chart to see if you’d be better off with a Roth or traditional. In almost every instance, a Roth does better. Special alert to new grads: choose the Roth! Then you’ll never get used to the tax deduction.
If you don’t know if your employer offers it, ask. And agitate for the option if you need to. It shouldn’t cost the employer much extra, if anything. And it will really pay off for you.