Insights : Article

Both Tax-Deferred and Roth Accounts Help with Retirement Planning

By   Joy Culver

March 03, 2014

Preparing for retirement is an important endeavor that requires careful planning. Available retirement plan options carry differing income tax impacts. Below are some things to consider.

Employer-Sponsored Retirement Plans
Participate in an employer-sponsored retirement plan, (i.e., a 401(k), 403(b), 457, SARSEP or SIMPLE), by contributing the maximum amount allowed. Contributions are often deducted from wages, thus reducing your taxable income. Plan assets grow tax-deferred, and an employer match of some or all contributions immediately enhances the rate of growth in the plan. 

Designate Contributions to Your Retirement Plan
Designate contributions to your employer-sponsored retirement plan, such as Roth retirement contributions. Although current taxable income is not reduced by a Roth contribution, in post retirement years, qualified distributions of contributions and investment earnings on the account are tax free. 

Roth contributions to an employer-sponsored retirement account have no income-based ceiling limits. Thus, employer-sponsored Roth retirement accounts attract high-income taxpayers, otherwise unable to contribute to Roth IRAs. High-income taxpayers over age 59 ½ , may be eligible to rollover an employer-sponsored retirement account to a Roth account. The accompanying tax consequence mirrors the conversion of a traditional IRA to a Roth IRA.

Roth IRA: Benefitting Your Retirement Plan
Roth IRA conversions have been a hot topic since income thresholds were eliminated in 2010. The advantages of converting a traditional IRA to a Roth IRA will be beneficial in upcoming years. For example, adding a Roth IRA to your retirement plan:

  • Turns your tax-deferred future growth account into a tax free growth account.
  • Avoids future required minimum distributions after age 70 ½ , leaving the entire balance to grow tax free, be utilized on your own timetable and passed on income-tax free to your heirs.

Although converting assets into a Roth IRA does generate current year tax, future tax savings are notable for a wide variety of middle and high income taxpayers.