Advisors' Corner

Do you want to help lower your taxes in retirement? A Roth IRA, with its potential for tax-free qualified withdrawals for you and, in many cases, your beneficiaries, may help you do just that—if certain IRS requirements are met.¹

And those are just a couple of the benefits a Roth IRA can offer.

1. Money can grow tax-free; withdrawals are tax-free too

You contribute money that has already been taxed (after-tax dollars) to a Roth IRA. There's no tax deduction as there can be with a traditional IRA. But, any growth or earnings from the investments in the account—and any distributions you take out in retirement—are free from federal taxes (and may also be free from state and local taxes too), with a few conditions.¹

2. There are no required minimum distributions

Roth IRAs do not have required minimum distributions (RMDs) for the original owner. Generally, traditional IRAs, pre-tax balances for 403(b)s, 401(k)s, and other employer-sponsored retirement savings plans do. If you don't need your distributions for essential expenses, RMDs may be hard to keep track of. The RMDs have to be calculated and withdrawn each year and may result in taxable income. Because a Roth IRA eliminates the need to take RMDs, it may also enable you to pass on more of your retirement savings to your heirs (see below).

3. Leave tax-free money to heirs

In many cases, a Roth IRA has legacy and estate planning benefits, but you need to consider the pros and cons—which can be subtle and complex. Be sure to consult an attorney or estate planning expert before attempting to use Roth IRAs as part of an estate plan. While RMDs can be required for inherited Roth IRAs, as they are for inherited traditional IRAs, distributions from inherited Roth IRAs generally remain tax-free, provided applicable requirements are met.

4. Tax flexibility in retirement

You've already paid the taxes on the contributions to a Roth IRA, so as long as you follow the rules, you get to take out your money tax-free. Mixing how you take withdrawals between your traditional IRAs and 401(k)s, or other qualified accounts, and Roth IRAs may enable you to better manage your overall income tax liability in retirement. You could, for example, take withdrawals from a traditional IRA until your taxable income reaches the top of a tax bracket, and then take additional money you need from a Roth IRA.

5. Help reduce or even avoid surtaxes

A Roth IRA may help you better manage your exposure to the Net Investment Income Tax (NIIT). This is because qualified withdrawals from a Roth IRA don't count toward the modified adjusted gross income (MAGI) threshold that determines the surtax. RMDs from traditional or pre-tax accounts, such as a workplace retirement plan—like a pre-tax 401(k)—or a traditional IRA, are included in MAGI calculations and do count toward the MAGI threshold for the surtax. So, depending on your income in retirement, RMDs could expose you to the NIIT, and using Roth accounts may help reduce that exposure.

6. Hedge against future tax hikes

Will tax rates rise in the future? There's no way to know for certain, but the top federal income tax rate remains far below its historical highs, and if you think it might go up again, a Roth IRA may make sense.

7. Use your contributions at any time

A Roth IRA enables you to take out 100% of what you have contributed at any time and for any reason, with no taxes or penalties. Only earnings and converted balances in the Roth IRA are subject to restrictions on withdrawals. Generally, withdrawals from a Roth IRA are considered to come from contributions first. Distributions from converted balances and earnings—which can be taxable and/or subject to penalties if the conditions are not met—begin only when all contributions have been withdrawn.

8. If you're older, you can continue to contribute as long as you work

As long as you have earned compensation, whether it is a regular paycheck or 1099 income for contract work, you can contribute to a Roth IRA—no matter how old you are. There is no age requirement for contributions, but you must be within the income limits in order to contribute to a Roth IRA.

For 2025, the IRA contribution limit is $7,000, or $8,000 if age 50 or older. For 2026, it is $7,500, or $8,600 if age 50 or older.

Learn more: Retirement topics - IRA contribution limits | Internal Revenue Service

9. If you're young, your income is likely to rise

Generally speaking, the younger you are (for example, if you're under age 30 and just beginning your career), the greater the chance that your income will be higher when you retire than it is now. And the greater the difference between your marginal rate now and your marginal tax rate in retirement, the more advantageous a Roth account can be.

Final Thought: It All Comes Down to Taxes

A Roth IRA can be a powerful tool for managing taxes—both now and in retirement.

It offers:

• Tax-free growth potential
• Flexible withdrawals
• No RMDs for the original owner
• Opportunities for tax diversification

But like any financial decision, it’s not one-size-fits-all.

Taking the time to understand how a Roth IRA fits into your overall financial plan can help you make more confident, informed decisions about your future.

Important Information: Roth IRA eligibility is based on your modified adjusted gross income (MAGI), and not everyone qualifies to contribute directly. Contribution limits and income thresholds are set annually by the IRS and may change. If your income exceeds these limits, alternative strategies—such as Roth conversions—may be available. Tax implications can vary, so consult a qualified tax or financial professional regarding your individual situation.

1. For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

2. Inherited Roth IRAs may require distributions.

3. Eligible assets include those from IRAs (traditional, rollover, SEP, and SIMPLE), and 401(k) with a former employer or other workplace savings plans with former employers. Unless the plan sponsor offers a Roth 401(k), or other workplace plan, you cannot convert to a Roth from a 401(k) while in service unless there is a distributable event to allow conversion to a Roth IRA. RMDs are not eligible assets for conversion.

This article is provided for educational purposes only and is not intended to provide tax, legal, or investment advice. Contribution limits, income eligibility, deductibility, and deadlines are subject to IRS rules and may change. Members should consult a qualified tax professional or financial advisor regarding their individual circumstances before making financial decisions.

Source: Adapted from content originally published by Fidelity Investments. View original article