This five-year rule may make it less beneficial to open Roth if you're already in middle age. There is another reason to protect yourself from a Roth and it relates to access to income now and potential tax savings in the future. A Roth can take away more income in the short term because you are forced to contribute money after taxes. With a traditional IRA or 401 (k), on the other hand, the income required to contribute the same maximum amount to the account would be lower, since the account is based on pre-tax income.
It's unlikely that you'll earn more in retirement than while you work. As a result, you'll likely find yourself in a lower income tax bracket when you retire. When it comes to retirement plans, there's no one-size-fits-all solution. If you're anxious to avoid taxes and RMDs later on, no matter what your tax bracket is, or you just don't want to worry about paying taxes on what you take out of your retirement account, an IRA might make sense.
The general idea is that if you expect your taxes to increase in the future, go for the Roth IRA and, if you think taxes will go down, you'll contribute to a traditional IRA and get tax savings today, while, hopefully, you'll find yourself in a lower tax bracket in the future. If you don't name a beneficiary, your spouse (if he is your primary beneficiary) can choose to inherit your Roth IRA or transfer it to a Roth IRA in your name. For those of you who are in a higher marginal income tax bracket, making a clandestine conversion to a Roth IRA could very well be a waste of time. Since a Roth IRA account is funded with dollars you've already paid income taxes on, you can withdraw contributions without taxes or penalties at any time.
In the family of financial planning products, the Roth Individual Retirement Account (IRA) sometimes resembles the great younger sister of the traditional IRA. Every investment comes with risk, so it's a matter of deciding if a Roth IRA aligns with your financial situation and goals. You can set up your IRA as part of an Ally Invest theft portfolio, a self-directed trading account, or a wealth management account. If you have a relatively modest income, that lower AGI can help you maximize the amount of the savers tax credit you receive, which is available to eligible taxpayers who contribute to an employer-sponsored retirement plan or to a traditional or Roth IRA.
The difference is that you can contribute more than you can contribute with a Roth IRA and there is no income limit. With a traditional IRA or 401 (k), you invest with pre-tax money (your contributions are deductible from taxable income) and pay income tax when you withdraw money when you retire. Roth and traditional IRAs allow you to make annual contributions for a given year until the date you file your income taxes for the following year, and you can continue making contributions as long as you have taxable income, no matter how old you are. For those of you who are in the highest federal income tax bracket, you should be especially careful when it comes to contributing to a Roth IRA.
If your income is relatively low, a traditional IRA or 401 (k) may allow you to receive more contributions to the plan as a tax credit for savers than you would save with a Roth. If it's set up as an Ally Invest Wealth Management account, tell your advisor that you'd like to transfer your 401 (k) or 403 (b) to an Ally Invest IRA.