Roth IRA FAQs

Our clients’ most common Roth IRA questions.

ROTH IRA FAQs:

Q: What is a Roth IRA?

A: A Roth IRA (Individual Retirement Account) is a type of retirement savings account that allows you to contribute after-tax income. A main benefit is that qualified withdrawals and investment earnings in retirement are tax-free. In contrast, a Traditional IRA allows you to make pre-tax or tax-deductible contributions, however you will pay income taxes on withdrawals during retirement. There are time and income restrictions, but, for the right client the tax-free growth can be a significant benefit.

Q: What is a Roth IRA conversion?

A: A Roth IRA conversion is the process of transferring funds from a traditional IRA or other pre-tax retirement account such as a 401(k) or traditional IRA) into a Roth IRA. This generally involves paying income tax on the converted amount in the year of the conversion, treating it as ordinary income. While there’s an upfront tax cost, the benefit is that future investment growth and qualified withdrawals from the Roth IRA are tax-free. These are not right for everyone as there is an upfront cost and some time constraints, but, as part of a larger plan, the tax-free nature of Roth be a powerful tool.

Q: What is a “Backdoor” Roth IRA?

A: A “Backdoor” Roth IRA is a retirement strategy that allows high-income earners to contribute to a Roth IRA even if their income exceeds the IRS limits for direct contributions. This method involves making a non-deductible contribution to a traditional IRA and then converting those funds to a Roth IRA on an annual basis. This strategy is most effective if it’s done consistently year after year and, like all tax strategies, should always be verified by your tax professional.

Q: What is a 529-to-Roth IRA Rollover?

A: A 529-to-Roth IRA rollover, introduced by the SECURE 2.0 Act, allows you to roll over unused funds from a 529 education savings plan into a Roth IRA for the designated beneficiary, tax-free and penalty-free, under certain conditions. The 529 account must have been open for at least 15 years and the beneficiary of the 529 and the owner of the Roth IRA must be the same person. For clients with balances left in 529 plans, this can be a valuable strategy to jump start the student’s lifetime retirement savings.