To Roth or Not to Roth in Your IRA
This brochure explains the Roth IRA and provides information to help you decide how after-tax and before-tax savings fit into your retirement savings strategy.
What is an IRA and how is it different from a 403(b)?
IRA: An Individual Retirement Account (IRA) is a great way to increase your retirement savings and take advantage of tax benefits. IRAs are set up by the individual. There are two IRA options—Roth and Traditional.
Traditional IRAs provide you with tax-deferred growth and possible tax deductibility now. Roth IRA contributions are made after-tax. You pay taxes up front, but all qualified withdrawals, including earnings, are tax free.
403(b): A 403(b) (also known as a tax-sheltered annuity), is a retirement savings program offered through the district that allows public school employees to save for retirement with payroll contributions.
Until 2006, all 403(b) contributions were made on a before-tax basis. Before-tax contributions reduce your taxable income and defer taxes until you withdraw the money. The IRS began allowing Roth 403(b) contributions in 2006, giving participants the option to designate their 403(b) contributions as before-tax or Roth. However, districts are not required to offer the Roth option.
Public school employees in districts where Roth 403(b) is not available should consider the benefits of Roth IRA contributions.
What is the benefit of Roth savings?
One of the greatest benefits of Roth savings is the ability to reduce your tax liability in retirement.
For decades, the assumption has been that most people pay a lower tax rate in retirement and, thus, would benefit from before-tax savings and tax deferred growth. However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions available under the tax code increase the chances that you could be in the same or higher tax bracket when you retire.
These changes mean that before-tax savings alone may not be the optimal tax strategy in every situation.
What does this mean to you?
In retirement, public school employees may have at least three sources of income: A pension, Social Security, and individual retirement savings. The first two are taxable as ordinary income in retirement. If an individual retirement savings is pre-tax, that will be taxable also. Any tax savings realized today could be more than offset by a higher tax bill in retirement. Roth savings provides an opportunity to receive tax-free retirement income.
How can you start making Roth IRA contributions?
WEA Member Benefits offers a Roth IRA to public school employees and their family members, including spouse, parents, parents-in-law, and children. It’s easy to open and start contributing to a Roth IRA, and you can start with as little as $20 per month. Plus, we charge just one low annual administrative fee with an annual fee cap.
Budget-friendly ways to make contributions
Recurring Monthly Contributions: You can make monthly contributions by setting up automatic payments from a checking or savings account either online or requesting a form.
One-Time Payment: You can go online to request a one-time contribution or submit an IRA contribution form and a personal check.
Is the Roth IRA right for everyone?
|Your situation||Roth IRA|
|Young public school employees||Earnings compound tax-free for decades. Paying taxes on contributions at current rates may be better than paying higher taxes on contributions and earnings later if you are taxed at a lower rate today.
Note: If you are married with children and are taking advantage of special tax credits, you may be better served with before-tax contributions if Roth contributions would cause you to lose your tax credits.
|Middle-aged to older public school employees||Public school employees may have the benefit of receiving retirement income from a pension and Social Security, as well as a 403(b) if contributions have been made. All are taxed when the money is withdrawn (unless Roth 403(b) contributions were made). Because retirement income from these sources may be substantial, you could get bumped into a higher tax bracket. If this is the case, you may benefit from paying taxes today on Roth contributions.
A Roth IRA gives you access to some of your nest egg in retirement tax-free, allowing you to manage your tax situation and possibly prevent you from moving into a higher tax bracket.
|Pre-retirees and retirees still earning a wage||Roth contributions may also come in handy for funding college education. You can access the money tax-free for this purpose if the Roth account is at least five years old and you are at least age 59½ when the child enrolls in college. Plus, retirement accounts generally aren’t part of federal financial aid calculations.
The advantages to Roth IRAs are:
Roth IRA eligibility?
Not everyone is eligible to contribute to a Roth IRA. Your income must not exceed the stated Internal Revenue Service limits. Income limits are not applicable to the Roth 403(b).
Also worth noting is the difference between contribution limits, withdrawal options, and eligibility rules for the different retirement savings options.
Let us help you evaluate whether a Roth IRA fits into your financial plan. Ask questions and get assistance by setting up a personal phone consultation or calling 1-800-279-4030.
IRA 4232-292-0123 (W)