A Roth IRA is a unique retirement savings vehicle that allows eligible individuals to set aside money today for a potentially tax-free income stream in the future. Like a traditional IRA, a Roth arrangement allows individuals to make annual contributions of up to $6,000 in 2022, or $7,000 for savers age 50 and older. That is where the similarities between the two arrangements end.
While contributions to traditional IRAs are made with pre-tax dollars, those made to Roth accounts are taxable in the year of the contribution. Conversely, distributions from traditional IRAs taken in retirement are taxable as ordinary income, whereas qualified distributions from Roth IRAs may be made tax-free when account owners are at least 59½ years of age, and they have owned those account for a minimum of five years. Moreover, owners of traditional IRAs must begin taking required minimum distributions from their accounts when they reach 72 years of age, and any amounts passed on to beneficiaries must be used by heirs within 10 years of an original owner’s death. This is not the case for Roth IRAs, which do not have any minimum withdrawal requirements.
The decision of which strategy will ultimately be best comes down to whether an investor prefers to pay Uncle Sam up front when they contribute to their accounts, or if it makes better sense for them to pay taxes on their withdrawals in retirement taxable.
For many investors, the answer may be determined already by the Internal Revenue Code, which limits Roth IRA participation to those individuals whose modified adjusted gross income (MAGI) fall below certain thresholds. For 2022, the ability to make annual Roth IRA contributions is phased out when single-filing taxpayers have MAGI of $144,000, or $204,000 for married couples filing joint returns. However, high-earning investors may rely on a back-door IRA or a Roth conversion to work around the Roth income thresholds. With a Roth conversion, investors may make tax-deductible contributions to traditional IRAs today and then convert those accounts to Roths in the future to receive benefit of tax-free and often penalty-free withdrawals before and during retirement. While a Roth conversion may make sense in the current environment of historically low interest rates, investors should be aware that they will owe tax on some or all of the converted amount.
With all of these factors in mind, it behooves investors to estimate their income tax rates into the future to determine whether the tax implications of a conversion now will outweigh the potential benefits in the future, including tax-free distributions in retirement and the exclusion of Social Security payments from taxable income. Yet, the decision to make an IRA conversion should not be based solely on taxes; rather investors should seek the counsel of experienced financial advisors to help determine how these tools best fit within their unique financial needs and estate planning goals.
The professionals with Provenance Wealth Advisors assist investors in developing comprehensive estate and retirement plans that help to meet individuals’ particular short-term and long-term needs and goals with an eye on maximizing tax efficiency.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2001 or via email at
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888. Brendan Hayes is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Posted on June 23, 2021