By Mike Gibbons, RICP®

There are many options available to us for saving for retirement—both plans available through our workplace and IRAs we can open on our own. The various plans have their own pros and cons. If you’re concerned about paying taxes in retirement, find out how Roth IRAs and Roth 401(k)s can provide tax benefits today while your money grows and provide a tax-free source of income in your retirement years. 

Benefits Of Roth IRAs 

Individual retirement accounts are one of the most popular ways to save for retirement, outside of a workplace plan. The money you save in a Roth IRA has the potential to grow tax-free while providing tax-free withdrawals in retirement. Also, if you decide you need the money you’ve saved in a Roth before you retire, you can withdraw those contributions (but not earnings) without penalty at any time. 

Once you’ve had the account open for five years, you can withdraw your contributions and earnings without tax or penalty for certain qualified uses, including buying a first house, or when you turn 59½. Be sure to check the rules before making such a withdrawal. 

Roth IRAs also have no minimum required distributions, meaning you don’t have to start taking funds out of the account when you turn 72. If you have enough retirement savings or pension and thus don’t need the money in the Roth, it can continue growing tax-free throughout your retirement. If you choose to pass that money down to your heirs, they can also enjoy tax-free income. Be sure to consult with a financial advisor or tax expert to follow the rules around passing down Roth IRAs.

Note that unlike “regular” IRAs, the money you contribute to a Roth IRA can’t be deducted from your income when you file. However, that deduction may be limited if you also contribute to a retirement plan at work. 

Roth 401(k) And Your Workplace Retirement Plan

As the name suggests, a Roth 401(k) offers some of the same benefits as a Roth IRA plan. You contribute funds that you have already paid taxes on, the money can grow tax-free over the years, and then you can withdraw the money tax-free in retirement. Though you must take required minimum distributions when you turn 72, unlike a Roth IRA, you can avoid that requirement by rolling your Roth 401(k) into an IRA when you retire.

Unlike a Roth IRA, monies contributed to a Roth 401(k) are eligible for any matching funds your employer provides. Because the annual contribution level is much higher for a 401(k), you can choose to put some of your workplace funds into a Roth 401(k) and some into a regular 401(k). That way you can enjoy some of the immediate benefit of reducing your taxable income through contributing to a 401(k). 

Checking Up On Your Retirement Readiness

Tax laws are always changing, so having tax-free withdrawals available in retirement can help give you confidence that your savings will be available to you in full. Meet with us at Gibbons Financial Group for a consultation on your retirement planning, which can include an overview of what you’ve already saved, whether you’re on track to meet your goals, and a plan based on both to move forward. Call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. 

About Mike

Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.

Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn or visit his website.

*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss specific tax issues with a qualified tax advisor.