Will Roth IRA Remain a Tax-Free Investment Option?

Learn about the advantages of investing in a Roth IRA and how it can help you save on taxes now and in the future.

Will Roth IRA Remain a Tax-Free Investment Option?

The Roth IRA program is growing rapidly, making significant contributions to the nation's economy. It is clear that the government has no intention of ending the program, which would be the case if withdrawals were made taxable. I have never been more of a fan of Roth IRAs and Roth conversions than conventional wisdom in the financial planning business. Yes, Roths have some advantages over traditional IRAs.

For instance, the IRS does not require you to take taxable distributions from a Roth IRA after age 72, which is mandatory with traditional IRAs. Additionally, Roth IRAs grow tax-free and withdrawals are not taxable. Plus, accounts come with no required lifetime minimum distributions (RMD). However, traditional IRAs offer some potential tax benefits that are lost when money is moved.

If you want to enjoy tax-free earnings in retirement, a Roth IRA is the best option. When you choose this type of individual retirement account, you get a kind of Roth IRA tax shelter. You put money in now and it grows tax-free, including any profits you make with it. Because of their role in paying taxes now and avoiding taxes later, Roth IRAs are often recommended to young workers who expect to be in higher tax brackets as they age and their incomes increase. On the other hand, Roth IRAs have no RMD during their lifetime, so their money can stay in the account and continue to grow tax-free. Roth IRAs are financially attractive due to tax-free investment gains, no future taxes at retirement, and lack of required minimum annual distributions.

The wealthy have taken advantage of various solutions and loopholes to protect income tax money in Roth IRA accounts. Unfortunately, this has turned Senator Roth's blessing for workers into a tax-free piggy bank for the uber-wealthy. Those who are not normally eligible for a Roth IRA can use it to create an account and a tax-free cash fund. Moving to a Roth IRA also means you won't have to make the required minimum distributions (RMD) on your account when you turn 72. The proposal allows for up to 203 conversions to Roth over 10 years, subject to 400,000 limits, etc. If your taxes increase due to increases in marginal tax rates or because you earn more, placing you in a higher tax bracket than a Roth IRA conversion can save you a considerable amount of money in long-term taxes. Wealthy investors can use backdoor Roth IRAs to hold valuable stocks such as Tesla or Apple or even buy pre-IPO stocks that owners think might eventually appreciate in value.

People who inherit their Roth IRA account will have to accept RMD but they will not have to pay any federal income tax on their withdrawals as long as the account has been open for at least 5 years. It is unlikely that new Roth IRA tax laws will affect contributions made today. If you are about to retire and plan to access your retirement funds soon, there is no point in converting to a Roth IRA as you cannot access your converted funds without penalty until five years after the conversion. However, one individual used his Roth IRA to buy shares in his startup which later became PayPal and was not yet listed on the stock exchange. You can open Roth IRA accounts at any age whether you're 22 starting your career or 70 and expecting to retire soon. Chances are you'll never have to worry about a new Roth IRA tax law affecting the contributions you're making today.