16 January 2018

Why More Investors Are Jumping Into Roths

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You probably know the conventional wisdom: Tax-free Roth IRAs and 401(k)s—a relatively new and fast-growing breed of retirement account—make the most sense for young investors. But a growing chorus of advisers, backed by new research, indicates older investors can benefit from Roths, as well. Why?

Broader Benefits 

Those who expect their marginal tax rates to remain the same in retirement can also benefit from a Roth—or more specifically, from the tax-free withdrawals they can take from these accounts when distributions from a regular 401(k) or IRA would push them into a higher tax bracket.

Moreover, workers in their 40s, 50s and early 60s who want to contribute the maximum to a tax-advantaged retirement savings account can accrue more wealth with a Roth than with a traditional 401(k), even if their marginal tax rates actually decline by as many as 10 percentage points in retirement.  

Tax Flexibility   

With a Roth, an individual will have a greater flexibility to manage future tax bills. If in retirement he has to withdraw a large amount from his IRA or 401(k) to pay for, say, a new car or a child's wedding, he can take a tax-free distribution from his Roth without inflating his taxable income and potentially subjecting himself to a higher tax bracket or higher Medicare premiums.

 Invest the Deduction  

If the worker were to contribute the $23,000 pretax maximum to a traditional 401(k) and then take the 28% upfront tax deduction he'd receive for that contribution and invest it in a brokerage account, he'd still likely come out ahead with a Roth. The reason: As this investment accrues dividends, interest and realized capital gains, those profits are taxed. The Roth, in contrast, grows tax-free.  

Click here for the full article from The Wall Street Journal.

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