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?
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.
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.