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Roth IRA Part 3:  Less Common Ways to Benefit from Roth IRAs Thumbnail

Roth IRA Part 3: Less Common Ways to Benefit from Roth IRAs

Tax Planning Retirement Planning Financial Planning

From treating some employer contributions as Roth contributions to the potential secondary tax impacts, there are some less common ways Roth-type accounts can benefit you.  Today is part 3 of our series on the incredible Roth IRA, we discuss some of those less common ideas, next.

Watch Now:  Tne Incredible Roth IRA Part 3: Less Common Ways to Benefit From Roth IRAs

Treating your Employer Contributions as Roth Contributions

In the Secure Act 2.0 passed in late 2022, there was a provision in the bill to elect certain types of employer contributions as Roth contributions.  Here's how it works.

  1.  The eligible employer contributions must vest immediately -  Vesting is a term that refers to how much of a retirement benefit you have earned.  To encourage employees to stay with the company, the employer will place restrictions on how much of the contributions made by the company you can take with you if you leave.  Non-vested contributions are forfeited and returned to the other plan participants.  If the type of employer contribution is 100% vested to all employees, you can elect to treat it as a Roth contribution.
  2.  Your employer is still going to take the tax deduction for their contribution - this means you will get to treat the portion you elect as taxable income in the year you earn it.  We just don't know how that will be reported on a W-2 yet, because this is still very new.
  3.   Your employer contributions grow like other Roth IRAs. - You get to treat this as a Roth account where the earnings on those contributions have the potential to not be taxed.

In part 1 of our Roth series, we showed the impact on George and Jane Jetson to switch their contributions from pre-tax to Roth.  Here is how switching part of their employer contributions also impacts them.  

Our projections show that they would have over $100,000 more in Roth funds when they retire at age 65.

In addition, our projections also show a significantly larger balance (over $200,000) in Roth funds when Jane dies.  (Part 2 of our series showed the impact of Roth Accounts on their kids)

Keep in mind, that we have only isolated the Roth from the pre-tax funds in the chart above.

But they would have approximately the same total balance at retirement.  They would however have approximately $200,000 more when switching their employer contributions to Roth accounts.

Why would this be?  In their case, it has to do with not having to take the required minimum distributions from their Roth accounts.

This will also have an impact on their children.  Their kids will be required to withdraw the funds from the Roth accounts over 10 years, but they won't have to pay taxes (under current law) on those distributions.

Pay Now vs. Pay Later

There is a cost to do this.  As mentioned above, by electing to treat eligible employer contributions as Roth contributions, you will have additional earned income. 

Based on their income, and assuming some cost of living adjustments over their remaining working years, We project the tax cost to George and Jane would be approximately $15,166.

In part 1, we showed where switching their current contributions to Roth from pre-tax would cost them roughly $53,000 more over their remaining working years.

The total increase to their tax bill to do both of these things would be $68,000. But as we illustrated in both parts 1 and 2, it is important to look at this through a very long-term lens.

Other Interesting Ways Roth Accounts Help You in Retirement

There are a number of expenses in retirement that are driven by your adjusted gross income.  Because distributions from Roth accounts are not currently taxable, it can help keep your adjusted gross income very low.  Here is how this could impact you.

  1.   No IRMAA Taxes - IRMAA stands for Income Related Monthly Adjustment Amounts.  If you have a high income in retirement, you get to pay extra for your Medicare Part B and Part D premiums.  
  2.   You may qualify for Premium Credits under the Affordable Care Act - This is particularly important if you are planning to retire before the Medicare eligibility age (65 years old).  Premium credits are income-driven.  Roth accounts can generate income that does not count toward those limits.  Instead of paying hundreds of dollars for health insurance premiums, you may be able to significantly reduce your outlay for coverage. 
  3. Reduce or eliminate tax on your Social Security benefits - It doesn't take long before a portion of your Social Security benefits become taxable.  Since distributions from Roth Accounts are not included in your taxable income, you may be able to reduce or eliminate federal taxes on your Social Security benefits.
  4.  Eliminate Captial Gains taxes on the sale of non-qualified assets - If your adjusted gross income is under certain thresholds, you don't owe capital gains taxes on sales of assets.  This basically makes those sales tax-free. 

Compounding is The Driver Of These Benefits

The biggest benefits of the Roth IRA come from the power of compounding.  One of the biggest factors in the compound returns equation is time.  The longer you have to save and accumulate, the more powerful the benefits. 

Just because you're older, doesn't mean these types of accounts won't benefit you or your family.  It is important to look at this from a very long-term point of view, and even consider the next generation in your thought process.  We can help you with that.  Simply fill out the form below to connect with an experienced advisor on our team. 

Appearing in this video:

Juley Daley, RICP

Julie is a financial advisor in St. Clairsville, Ohio.

Evan Brockmeier

Evan is a financial advisor in Marietta, Ohio.

Neal Watson, CFP

Neal Watson is a financial advisor in Marietta, Ohio.