You are presented with a wide range of methods by a Roth IRA account to manage your income taxes. The text you are reading intends to expand on a the ample tax-savings available, as generally, there are no Roth IRA taxes.
The big benefit of the Roth IRA is that Roth IRA withdrawals, when done properly, are tax free. Reducing your federal income taxes in retirement can potentially free up a greater portion of your retirement income for your living expenses, as well as other discretionary spending such as travel or leisure activities. Additionally, the money in your Roth IRA that you do not spend can be passed on to your beneficiaries tax-free.
Furthermore, there are no minimum distribution requirements for a Roth IRA as with the traditional IRA. A Roth IRA lets you handle your Roth IRA withdrawals from your retirement savings in a better way. It is fully up to your discretion when and how much you want to take out from your Roth IRA account. If you have different channels to support your post-retirement needs, you have no need to take Roth IRA withdrawals.
The other advantage of a Roth IRA is that it minimizes the tax-payable on your Social Security Income. Because the Roth IRA withdrawals are not considered as taxable income, they have no adverse impact on your Social Security tax rates. On the contrary, customary IRA withdrawals are considered to be ordinary income, and as such it augments your total income and may thereby increase the tax you pay on your social security income.
You must be at least age 59½ to qualify for tax exempt Roth IRA withdrawals. Moreover, it is incumbent on you to fulfill a 5-year investment holding period. Violation of either condition can result in income tax or penalties. Note that while qualified IRA withdrawals are exempt from federal income tax; they may be subject to state income tax.
As previously mentioned, you are required to pay federal income taxes on amounts converted from a traditional IRA to a Roth account, and some refer to this as the Roth IRA tax. The only method to alleviate the sting of this tax is to do a partial conversion each year over a number of years, thereby spreading the tax.
For any of your Roth IRA not used during your lifetime, your heirs will also be able to enjoy tax free distributions.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions