Here are three situations where a Roth probably makes the most sense:
1. You are currently in a lower tax bracket, but you expect that to change. Let’s say you are a young professional who is anticipating salary increases, which will put you in a higher tax bracket down the road. Contributing to a Roth IRA or Roth 401(k) means you pay the relatively low rate on taxable income now. Once you’ve retired, you will not pay any taxes on qualified distributions from the plan.
2. You are close to retirement and are concerned about required minimum distributions (RMDs). If you’ve been a disciplined saver and have contributed a healthy percentage of your income to traditional accounts for many years, eventually you’ve got to pay the piper. Generally, you must take your first RMD from Traditional IRAs and 401(k)s by April 1 after the year you turn 73. As the name suggests, these withdrawals are required, even if you don’t need the income at the time.
RMDs could bump you to a higher tax bracket. Qualified distributions from a Roth 401(k) or Roth IRA, on the other hand, would not create taxable income or increase your tax rate. Therefore, a Roth contribution may be preferable to limit the RMD income taxed at a higher rate.
Someone in this position may also want to consider the effect on their beneficiaries. The SECURE Act, passed in 2019, requires most non-spouse beneficiaries to withdraw all retirement account balances within 10 calendar years. This change increases the likelihood that traditional account withdrawals will push them into a higher tax bracket, which makes Roth assets even more attractive.
3. You are a prodigious saver. Suppose you can contribute the maximum amount to a retirement plan ($23,000 for 2024 or $30,500 if you’re over age 50), even if you don’t get a tax break. In this case, the Roth account effectively enables you to save more in a tax-advantaged manner. Saving the maximum amount ultimately results in more after-tax retirement assets for the Roth account balance than a traditional contribution that is pretax.
