When a Roth retirement account makes sense

As more employers incorporate Roth options into workbased retirement accounts, many of you have written to ask which one is preferable. As always, the answer depends on your situation.

The big difference between a traditional retirement option and a Roth (regardless of whether it is a 401(k), 403 (b) or an Individual Retirement Account) is when you pay taxes. With a traditional option, you pay in the future and with a Roth, you pay today.

For example, if you earn $50,000 and you make a 10 percent contribution into a traditional 401(k), the $5,000 that goes in to the account is removed from your taxable income. Then, the IRS and other municipal taxing authorities levy taxes on what remains - in this case, $45,000. You do not pay taxes on the money that is inside of the traditional plan while it remains in the account, but after you reach age 59 1/2 and access the money, you will have to pay taxes based on your future tax bracket.

Additionally, after you reach age 70 1/2, Uncle Sam forces you to withdraw a certain amount of money each year from your traditional account--this is known as a Required Minimum Distribution.

What many people don’t realize is that RMDs can impact the taxation of Social Security benefits by potentially kicking you into a higher tax bracket. Additionally, they can increase Medicare costs, because individuals are subject to an Income Related Monthly Adjustment Amount, which is an extra charge on top of the stated Medicare premiums for those with Modified Adjusted Gross Income over $85,000 (single filers) or $170,000 (joint).

That charge can amount to an extra $13 per month to an extra $74.80 per month per person on top of their monthly premiums.

OK, now onto the Roth retirement plans. Your contributions to a Roth are not tax-deductible, so they are made with after-tax dollars. In the example above, you would pay taxes on the full $50,000 you earned, and then your 10 percent contribution would go into the Roth and grow tax-free. After you reach age 59 1/2 and access the money in a Roth account, there are no taxes due.

Additionally, Roth owners never have to withdraw money if they choose not to do so.

Should you use a Roth? If you are in a low tax bracket, the Roth allows you to pay taxes at your current rate and when you take your distributions, you avoid paying taxes at your future (hopefully) higher rate. But many tax experts are encouraging more people to use Roth options even if they are in high current tax brackets.

The reason is twofold: Tax rates are likely to rise in the future and, even if they don’t, it is nice to have some money in retirement that has already been taxed.

Additionally, for high-income earners, the only way to access a Roth may be through an employer-based plan. That’s because Roth IRAs have contribution limits based on income. For 2019, you can contribute $6,000 ($7,000 if over age 50) into a Roth IRA if your Adjusted Gross Income is under:

$193,000 for married filing jointly or qualifying widow/widower (if you make 193,000 to $203,000, you can contribute a reduced amount).

$122,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, (if you make 122,000 to $137,000, you can contribute a reduced amount).

$10,000 for married filing separately and you lived with your spouse at any time during the year.