THE ROTH OPTION: PAY NOW, SAVE LATER

You may be familiar with Roth IRAs, but do you know that some employer-sponsored retirement savings accounts, like 401(k) plans, also offer a Roth alternative?

Few people choose that option because they have to pay tax currently on the amount that goes into the Roth account. Paying more taxes now doesn't sound like a good idea.

But Roth accounts offer longer-term tax advantages:

  • Traditional retirement accounts present you with taxable income when you receive retirement distributions. Of course, many people expect to be in a lower tax bracket when they retire. Distributions from Roth accounts are entirely tax-free once you have established a five-year history of using a Roth account.
  • A traditional retirement account requires you to begin taking distributions when you reach age 70 1/2. Roth accounts have no required minimum distribution.
  • Taxable retirement distributions can have other adverse income tax consequences:
    • The higher your income, the greater the portion of your Social Security benefits subject to income tax.
    • Beginning in 2013, a 3.8 percent tax on investment income will apply to married couples with income above $250,000 and singles with income over $200,000. Taxable retirement distributions may push you over these thresholds.
  • For those on Medicare, the monthly premiums for some benefits are higher, depending on the person"s income. Roth distributions are not counted as income for purposes of the taxation of Social Security benefits, the 3.8 percent tax on investment income or Medicare premium determinations.

You can transfer funds from your traditional retirement account to a Roth account, but you must pay tax on the rollover amount. However, you cannot go the other way: Funds in a Roth account may not be transferred to a traditional account.

 
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