Wishing you had put more into a tax-free Roth IRA? You might just get your chance if you aim to hit the Roth IRA “sweet spot.”
Roth IRAs are increasingly popular. About a third of retirement investors own them, according to data from the Investment Company Institute.
A similar margin of those investors are under 40.
The reason why is not hard to grasp. Money contributed to a Roth confers no tax break today, but the growth and later withdrawals are tax-free.
What’s more, as our colleague Mitch Tuchman explains at MarketWatch, Roth owners are not subject to required minimum distributions (RMDs) after age 70-and-a-half.
Think about what that means for your retirement. Folks often are surprised by RMD requirements.
Many put off collecting Social Security — generally a good thing, since you get more for waiting — and avoid taking money out of retirement plans in their early retirement years.
Then they get hit with forced IRA withdrawals later on that push them into a higher tax bracket than they had planned.
Stack that on top of taxable Social Security income and taxable investment gains. Some people end up paying as much or more in taxes in retirement as when they worked!
Pump it up
So what’s the answer? If you’re young, make sure you put money into a Roth IRA and into a regular 401(k).
That approach could give you tremendous flexibility later in life to control your tax rates.
If you’re already closing in on retirement it can feel like it’s too late.
But, as Mitch explains, there is a nifty “Roth sweet spot” strategy that allows diligent savers a chance to pump up a Roth account while minimizing the pain of taxes.
Yes, you will be taxed on money you move from a traditional IRA or 401(k). However, if your income has fallen dramatically it’s possible to time your contributions and avoid the worst of the tax bite.