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Looking for a tax break? Roth after-tax contributions just might be the ticket—provided you meet certain conditions. In this article, we’ll tell you what you need to know.
Roth contributions can provide tax-free retirement income
When you make pre-tax contributions to your retirement plan account, you pay taxes later—when you take the money out.
When you make Roth contributions, you pay taxes now. But you get a tax break later on.
When you take your money out, you won’t owe federal tax on your Roth contributions or their earnings, as long as you meet both of these conditions:
- You’re at least age 59½.
- You made your first Roth contribution at least five years before.
Not all employer retirement plans offer Roth contributions. Refer to your plan’s rules or contact Vanguard to see whether the Roth option is available.
Roth contributions can protect against rising tax rates
Over time, tax rates go up and down. None of us knows what tax rates will be in the future. One way to deal with this uncertainty is to have at least some Roth savings.
If you make Roth contributions and tax rates rise, you’ll have at least some Roth money you can take tax-free.
Roth contributions can preserve your money for you and your heirs
It’s not just you who might benefit from having Roth money in your retirement savings. It also offers tax advantages for your beneficiaries.
Whoever inherits your Roth account would not have to pay income tax on distributions, as long as the first Roth contribution was made at least five years before.
So is Roth right for you?
It depends whether you want to lower your taxes now or in retirement.
Roth might make sense if:
- Your career is just getting started.
- You contribute the maximum allowed by your retirement plan.
- You pay taxes at a low rate today.
- Your income prevents you from contributing to a Roth IRA.
But Roth isn’t for everyone. It depends on your situation.
Roth might not make sense if:
- You’re behind on savings and expect Social Security to be the mainstay of your retirement income.
- Your pay spikes from time to time because of commissions or bonuses.
- You receive certain tax credits such as the earned income tax credit.
You may want to consult with a tax or financial advisor to help determine what’s right for you.
Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold federal and state taxes from the taxable portion of your withdrawal. You may need to pay a 10% federal penalty tax if you take money out early.
Vanguard does not provide individual tax advice. You should consult with your tax advisor before making any decisions as to your specific circumstances.