Providing for yourself in retirement has changed a lot over the generations. In the past, you could count on your employer to give you a healthy pension. Now, it's largely up to you to find ways to save if you want a financially secure retirement.
The IRA has been an invaluable tool to help people save for their golden years, especially among those without access to employer-sponsored retirement plans. When it comes to discussing IRAs, most people have typically focused on traditional IRAs, which have the benefit of offering a nice up-front tax break for many taxpayers. Yet as it turns out, the Roth IRA has become increasingly popular among taxpayers lately, suggesting that people are making tax-smart moves that recognize the unique value that these tax-free retirement savings vehicles offer. Below, we'll look at how the tide has turned toward Roth IRAs and why they're worth considering.
An introduction to Roth IRAs
Roth IRAs are a lot different from how most retirement accounts work. With typical traditional IRAs and 401(k) plans, money you contribute gets taken out of your taxable income, either by being deducted from gross income or by never having been included in gross income in the first place. For 2019, contribution limits of $6,000 for those under 50 and $7,000 for those 50 or older apply, and as long as you have that much earned income from a job or a self-run business, you'll be able to contribute the full amount as long as your adjusted gross income falls below certain thresholds. Those limits depend on your filing status, as shown below for the 2019 tax year:
For this filing status:
Contributions for 2019 phase out in this range
Single, head of household, or married filing separately IF you didn't live with your spouse during the year
$122,000 to $137,000
Married filing jointly or qualifying widow or widower
$193,000 to $203,000
Married filing separately IF you lived with your spouse at any point during the year
$0 to $10,000
If your income is less than the low end of the range above, there's no reduction of your contribution limit. Those with income within the phase-out range get a partial contribution, and you can't contribute anything if your income is above the top of the range.
Roth IRAs are catching up
Roth IRAs have always had a chip on their shoulder in terms of taxpayer use. More than twice as many taxpayers have traditional IRAs as have Roth IRAs, according to the most recent data available from the IRS. Total assets are even more tilted toward the traditional side, with $6.82 trillion in traditional IRA assets compared to just under $700 billion in Roth IRAs as of the end of the 2016 tax year.
However, Roth IRAs are getting more popular. During 2016, more than half again as many taxpayers contributed to Roths as to traditional IRAs, and at $22.2 billion, the dollar amount put into Roth IRAs topped traditional IRA contributions by more than $4 billion.
Even better is the fact that people are being smart about Roth contributions. Among those with incomes under $50,000 -- who benefit least from the immediate deductions that traditional IRAs offer -- those using Roths outnumbered traditional IRA use by about 1.6 million to 950,000.
Greater use of Roth IRAs should leave retirement savers in a more comfortable position heading into retirement. With traditional IRAs, account balances can be deceiving, because you'll still need to pay income taxes on your withdrawals during retirement. That'll leave you with less in after-tax retirement savings than you might have expected. But with Roth IRAs, the tax-free treatment of withdrawals leaves you keeping 100% of your retirement account balance -- making planning a lot simpler.
Roth IRAs aren't for everyone, but they have distinct advantages over other retirement accounts that make them worth a closer look. As lower income tax rates make the benefits of Roth IRAs even clearer, it's encouraging to see more taxpayers using them effectively.
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