You’ve likely heard a lot of buzz over the years about Roth IRAs, a popular IRA with tax-free growth. Unlike traditional IRAs, which offer the immediate benefit of tax-deductible contributions while you’re working, the main appeal of Roth IRAs is the long-term benefit of tax-free future income.
But does a Roth IRA make sense for your retirement? If so, are you eligible to open one, or should you convert your existing retirement accounts to a Roth? As you might guess, the answer depends on your personal situation. But here are some considerations that may help you decide if a Roth IRA is right for you.
- Withdrawals are tax free and are penalty free after age 59½.1 That’s because money placed in a Roth IRA is taxed in the year it’s deposited.
- Any growth on your money is tax free.
- Because withdrawals are not taxable, they aren’t included in the formula that determines how much of your Social Security is taxable. (Withdrawals from traditional IRAs, 401(k)s and 403(b)s are counted in this formula.)
- There are no mandatory withdrawals (required minimum distributions, or RMDs), allowing you to keep funds in the account as long as possible.
Roth IRA features
Roth IRAs have unique features that can help you make the most of your hard-earned money, depending on your situation. Consider these factors, especially when preparing or updating your retirement income plan or estate plan.
Saving on taxes
- If you’re retired, you can move money from a traditional IRA or other qualified retirement accounts to a Roth IRA. This may be beneficial if you expect your tax bracket to be higher in the future when you take your money out than it is now.2
- If you’re still working, contributing to a Roth IRA may also be beneficial if you expect your tax bracket to be higher when you take money out. For the rules and limits on contributions, go to the IRS web page comparing Roth and traditional IRAs .
- If you’re still working and your income is too high to contribute directly to a Roth IRA, you can roll over money from a traditional IRA or old retirement plans to a Roth IRA to get the benefits of tax-free income in retirement.2
Leaving money to others
- Because there are no mandatory withdrawals (RMDs) from a Roth IRA, it can be a tax-efficient way to pass money to others. Roth IRA money—including any accumulated growth—passes directly to your beneficiaries free of income taxes without having to go through probate. (Estate taxes may apply.) Always consult a tax advisor for details on your situation.
Should you roll over retirement money to a Roth IRA?2
Here are some important things to know about Roth IRA conversions (rollovers):
- You can convert as much or as little money as you want from a traditional IRA to a Roth IRA at any time, regardless of your income. Taxes will be due on any amounts you transfer in the year of the transfer.
- If the money in your traditional IRA is after-tax money (you didn’t take a deduction on your contributions), you may not owe tax on that money when you convert to a Roth IRA.
- If you’re retired, you can convert all or part of other retirement accounts, including 403(b) or 401(k) plans, to a Roth IRA. You’ll owe taxes on the amount of pretax assets you roll over.
- If you’re still working, check your current employer’s plan rules to see if you can roll over money to a Roth IRA. You should be able to roll over money from previous employer plans.
- If you’re still working and your employer offers a Roth 401(k) or Roth 403(b), you can convert your regular 401(k) or 403(b) to the Roth plans. Then, when you leave your employer, you can roll over your Roth 401(k) or 403(b) directly to a Roth IRA, but make sure to consult with your employer regarding treatment of matching contributions and other details.
- Once you convert to a Roth IRA, you’ll owe no additional income tax on the converted funds—or any earnings on those funds—during retirement, provided you own your Roth IRA for at least five years.
- Roth IRAs offer the same investment options as traditional IRAs.
Things to consider before converting
- If you’re required to take an RMD in the year you convert to a Roth IRA, you must do so before converting.
- Converted assets in the Roth IRA must remain in the account for at least five years before you make any withdrawals in order to avoid penalties and taxes. This is known as the “5-year rule.”
- If you convert a large sum to a Roth IRA, it may raise your tax bracket for that year since the amount you convert is considered taxable income. This may be avoided by converting no more than what would keep you in your current federal income tax bracket without bumping you into the next one.
- If you believe your income may drop substantially in a certain year but will increase in future years, you could plan to convert to a Roth since you may be in a lower tax bracket that year.
- If you don’t expect to be in a higher tax bracket in the future, you may be better off not converting retirement accounts to a Roth IRA. Keep in mind, however, that even though you will not be working full time in retirement, your taxable income could still increase due to Social Security payments, part-time work, required distributions from non-Roth IRA accounts, and the loss of some deductions or tax credits you may have had while working, saving for retirement and raising a family.
How does a Roth IRA fit into your withdrawal strategy in retirement?
Many factors should be considered when planning your withdrawal strategy in retirement, including your current and future tax rates. In general, it may make sense for those who expect to be in the same or a higher tax bracket in retirement to withdraw money from their taxable accounts and tax-deferred accounts first before withdrawing from a Roth IRA. Since earnings in Roth IRAs are not taxed, delaying distributions will allow potential earnings to continue to grow tax free.
Tools to help you decide
If you’re considering a traditional IRA or a Roth IRA for your retirement strategy, the TIAA IRA Selector Tool can help you find out which type of IRA may be best for your financial situation.2
For more information on Roth IRAs, call us at 844-TIAA-IRA (844-842-2472). For help with a retirement income plan built around your needs and goals, talk to a TIAA financial consultant by calling 888-583-2535, weekdays 8 a.m. to 7 p.m. (ET).