Rock Your Retirement with a Roth IRA

Introduction to Roth IRAs

Roth Individual Retirement Accounts (IRAs) offer a powerful avenue for tax-free growth and withdrawals in retirement. Unlike traditional IRAs, contributions to Roth IRAs are made with after-tax dollars, allowing your investments to grow tax-free and enabling tax-free withdrawals during retirement. Additionally, Roth IRAs are not subject to required minimum distributions (RMDs), providing greater flexibility in retirement planning.

Contribution Limits and Income Parameters for 2025

For the tax year 2025, the contribution limits for Roth IRAs are as follows:

• Individuals under age 50: Up to $7,000.
• Individuals aged 50 and older: Up to $8,000, which includes a $1,000 catch-up contribution.

Eligibility to contribute to a Roth IRA is determined by your modified adjusted gross income (MAGI):

• Single Filers:
  • Full contribution allowed if MAGI is less than $150,000.
  • Partial contributions permitted if MAGI is between $150,000 and $165,000.
  • No contribution allowed if MAGI exceeds $165,000.
• Married Filing Jointly:
  • Full contribution allowed if combined MAGI is less than $236,000.
  • Partial contributions permitted if MAGI is between $236,000 and $246,000.
  • No contribution allowed if MAGI exceeds $246,000.

These thresholds have been adjusted for inflation from previous years.

irs.gov

Maximizing Contributions

To fully leverage the benefits of a Roth IRA:

1. Assess Eligibility: Determine your MAGI to confirm your eligibility for full or partial contributions.
2. Contribute Early: Making contributions early in the year allows more time for potential growth.
3. Utilize Catch-Up Contributions: If you’re aged 50 or older, take advantage of the additional $1,000 contribution limit.

Roth Conversions: A Strategic Approach

If your income exceeds the Roth IRA contribution limits, or if you have significant assets in traditional retirement accounts, a Roth conversion may be a beneficial strategy. This involves transferring funds from a traditional IRA or 401(k) into a Roth IRA, paying taxes on the converted amount now to enjoy tax-free withdrawals later.

Situations Favorable for Roth Conversions:

• Lower Income Years: Converting during years when your income is lower can minimize the tax impact.
• Market Downturns: Converting investments when their value has decreased can result in a lower tax bill, allowing for potential tax-free growth when the market recovers.
• Anticipation of Higher Future Taxes: If you expect to be in a higher tax bracket in the future, paying taxes now at a lower rate can be advantageous.

Considerations and Potential Pitfalls

While Roth IRAs offer numerous benefits, it’s essential to be aware of potential pitfalls:

• Tax Implications: Conversions increase your taxable income for the year, which could push you into a higher tax bracket or affect eligibility for certain tax credits.
• Medicare Premiums: Higher taxable income can increase Medicare Part B and D premiums.
• Pro-Rata Rule: If you have both pre-tax and after-tax contributions in traditional IRAs, the IRS requires that any conversion include a proportional amount of both, which can complicate the tax implications.

Inheritance Considerations

Roth IRAs can be a valuable tool for estate planning. Beneficiaries can inherit Roth IRAs tax-free, though non-spouse beneficiaries are required to fully distribute the account within 10 years of the original owner’s death. This allows for continued tax-free growth during that period.

Backdoor Roth IRAs

For high-income earners who exceed the Roth IRA income limits, a backdoor Roth IRA provides a workaround. This involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. It’s crucial to understand the pro-rata rule and potential tax implications before pursuing this strategy.

Conclusion

Roth IRAs offer significant advantages for tax-free income in retirement. By understanding the contribution limits, income thresholds, and strategic conversion methods, you can effectively incorporate Roth IRAs into your retirement planning to maximize tax efficiency and financial flexibility.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.