Undoubtedly, you’ve heard speculation about future tax increases due to increased government spending during the pandemic. Such predictions have more people considering Roth IRAs since money that goes into these accounts has already been taxed, earnings grow tax-free, and qualified withdrawals are not taxed. If you’ve never had a Roth, here are some things to know.
2021 guidelines. You can’t contribute more than your taxable compensation. The maximum contribution to an individual Roth IRA is currently $6,000 if you’re under 50 and $7,000 if you’re 50 or older. To contribute the maximum amount, your modified adjusted gross income (MAGI) must be less than $125,000 if you’re a single filer or less than $198,000 if you’re married and file jointly. Allowable contributions are reduced for those with higher incomes up to $140,000 in MAGI for single filers and $208,000 in MAGI for married joint filers. Once those thresholds are reached, no contributions are allowed.
Rollovers. Individuals who have traditional IRA or 401(k) accounts* are allowed to roll some or all of these funds into a Roth IRA, regardless of their income. But it should be noted, the initial deposit into these pretax accounts and any subsequent earnings will be subject to tax when moved into a Roth, which could result in a higher tax bracket for the year. (*if their employer plan permits this)
Roth 401(k) accounts. A growing number of employers have added Roth 401(k)s to their retirement plan offerings. The Roth 401(k) provides many of the same advantages a privately held Roth IRA does. The employee’s contributions to both accounts are made with after-tax dollars, grow tax-free, and offer tax-free withdrawals during retirement. But the two have marked differences, including:
Unlike privately held Roth accounts, there are no income caps when contributing to an employer-sponsored Roth 401(k). And maximum contributions are considerably higher with a Roth 401(k). The standard limit is $19,500; with another $6,500 catchup for those 50 or older. (If you contribute to a traditional 401(k) and a Roth 401(k), your combined contributions can’t exceed these figures.) An employee with a Roth 401(k) may benefit from an employer match above these limits. However, the employer’s portion must go into a traditional 401(k) account and will incur income tax when withdrawn.
With the variety of retirement plans available today, it can be difficult to weigh each option’s advantages and disadvantages. Contact our office today for help determining which plan or combination of plans best suits your individual goals and circumstances.
We do not provide tax advice; please consult an accountant for more information.