December 17, 2021
You know the saying—”nothing is certain except death and taxes.”
Ben Franklin reportedly said that after signing the Constitution of the United States.
Too bad Franklin never met William Roth.
Come again?
You know, the retired senator from Delaware who invented the first Roth IRA account back in 1997.
What’s a Roth IRA?
It works the opposite way of a traditional IRA.
With a traditional IRA, you take a tax deduction when you contribute money now, and then pay taxes on future withdrawals.
But with a Roth IRA, you contribute money after-tax now, and then take tax-free withdrawals in the future (with some conditions, of course).
So why should you care if you pay taxes now or later?
Well, using a Roth IRA is a great way to save taxes if you believe that your marginal tax rate will be higher in retirement than it is today. It also gives you more flexibility with your distributions in retirement to manage the tax you pay.
Sounds great! Sign me up.
Not so fast.
There are rules that limit who can have a Roth IRA and how much they can contribute each year.
Generally speaking, individuals with income less than $140,000 are allowed to contribute up to $6,000 directly to a Roth IRA.
Above this income limit?
Well, you can still have a Roth IRA, but it’s not as straightforward as just making a regular contribution.
Without getting into the weeds, let me just say there are ways to convert a traditional IRA into a Roth IRA. This is often called a “back-door” Roth and it can be a great tax-saving strategy for high-income individuals.
Why am I telling you about this now?
Remember last week when I mentioned that Congress is trying to pass the “Build Back Better” Act?
Well, this bill appears to be losing steam. But if it passes, it could shut the back door on your Roth IRA.
Even if this particular bill doesn’t pass, it looks like our current Congress is set on trying to eliminate this tax strategy in the near future.
So if you don’t have a Roth IRA yet, now may be a good time to consider it. I would encourage you to talk with your investment advisor to see if a Roth IRA makes financial sense for you.
Tax laws frequently change. I don’t want you to look back someday and wish you had considered a Roth IRA.
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