To ‘Roth’ or not to ‘Roth’

We want to help you decide whether to Roth or not when creating retirement plans.

Here at Frisch Financial Group, we are often asked the question of whether or not retirement plan contributions should be made to a Roth. Unfortunately, there is no one blanket answer because it often depends on the specific situation. A Roth is a designated feature of certain retirement plan accounts, including IRA, 401(k), 403(b), and governmental 457(b) plans.

You get a tax deduction for making pre-tax contributions to your retirement account (i.e. traditional IRA and 401(k)). Additionally, if you are receiving a company match then it is considered a pre-tax contribution. These traditional IRA and 401(k) contributions are deducted or deferred from taxes, while Roth contributions are not eligible for a tax-deduction. Although there is not a tax break for contributions, Roth accounts grow tax-free.

Your Roth account earnings and withdrawals are not taxed because the contributions being made have already been taxed prior to being added to your Roth account. There are, however, certain criteria that apply to this financial investment that can affect whether or not your growth is taxed. If funds in the Roth are held for more than 5 years and withdrawals are made after age 59 ½, the appreciation is tax-free when withdrawn and you avoid a 10% penalty from the IRS.

Income taxes play a major part in the decision of whether or not your retirement plan contributions should be made into a Roth account. For example, if you are currently settled into a higher income tax bracket, but assume that you will transition into a lower tax bracket during retirement, then it may be a smarter option for you to have a traditional contribution instead of a Roth. However, if you feel as though your situation will be the exact opposite, then it could make more sense to choose a Roth contribution.

It can be difficult to make this decision, particularly if you have a limited background in finance. However, the decision of whether to Roth or not can be changed at any time. You can contribute to both Roth and non-Roth retirement plans within the same year and you can change that the following year, as long as your choice does not conflict with IRS limits. If you have a question about whether Roth contributions are right for you, then contact Frisch Financial Group. We are located in New York City, Long Island, Westchester and Tampa, Florida where we serve the surrounding areas.

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