A smart strategy for retirement income and taxes

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Key Points

  • Accounting for taxes in retirement finances could help your assets last longer.
  • A Roth IRA is one solution that provides tax advantages and flexibility in your working years and in retirement.
  • Following are four key reasons to consider a Roth IRA in your journey toward retirement.

Factoring taxes into your retirement income plan could help your assets last longer. Your financial advisor has options to help with this.

At the big-picture level, a diversified tax strategy — coupled with a tax-efficient withdrawal strategy — could help your assets last up to three years longer.1 There are specific solutions that can help support your financial goals and needs in this area.

Because of tax advantages and flexibility both in your working years and in retirement, a Roth IRA account could be one of the solutions your advisor discusses with you. Individuals with modified adjusted gross income below the annual phase-out range ($196,000 - $206,000 in 2020 if married filing jointly) are eligible to make a full contribution ($6,000 in 2020). If it’s appropriate for your situation and you have a longer time horizon, you may want to consider investing in one sooner rather than later in your journey toward retirement. Following are key reasons why.


Tax-exempt earnings and withdrawals

To make contributions to a Roth IRA account, you can use your paycheck or other income that has already been taxed. Here are the major tax benefits and flexibility that appeal to many investors.

  • Working years: You can access your contributions at any time with no tax consequences. Earnings on your contributions are taxed if you withdraw them from your Roth IRA and may be subject to a 10% early withdrawal penalty.

  • Retirement years: Qualified distributions from your Roth IRA in retirement are tax-exempt.2 In addition, Roth IRAs are not subject to annual required minimum distributions (RMDs).


Eliminating the uncertainty of future tax rates

When a tax-exempt solution is part of your long-term financial strategy, you eliminate the unknown of future tax rates. They can change over time. If you are funding a Roth today with money that has already been taxed, you help shield yourself from potentially higher tax rates years later when you retire.


May reduce Medicare premiums and Social Security taxation

Because qualified Roth IRA distributions are tax-free, they do not count toward income thresholds that affect:

  • Medicare premiums
  • Social Security taxation
  • Taxation of net investment income


Roth IRA conversions from another retirement account

If you make contributions to a traditional IRA or 401(k) account, you have the option to convert some or all of those contributions to a Roth IRA.3 Roth conversions can be made regardless of your income level, so you can convert even if your income is too high to make a Roth contribution.

Keep in mind that you cannot undo a Roth conversion, and although a conversion of pretax assets generates taxable income it might make sense if you are:

  • Temporarily in a lower tax bracket based on a change in income
  • Have assets outside your retirement funds to pay the tax
  • Have a long time until you plan to access the funds or you intend to leave the assets for your beneficiaries

If you have after-tax money in your 401(k) or IRA, you may have a special opportunity to convert these assets to a Roth tax free. There are special rules with these conversions, so you will want to be sure you understand all the implications before going forward.


Your Ameriprise advisor provides you with personalized advice

Addressing taxes now gives you more control and could help your assets last longer in retirement. Your financial advisor is committed to helping you in this area. They will discuss the benefits and downsides of a Roth IRA, including whether it’s appropriate for you based on your financial goals and needs. Your advisor can also collaborate your tax professional or refer you to one in your area.  


1 2015 Tax-Efficient Withdrawal Strategies, Financial Analysis Journal, Volume 71, Number 2.

2 After meeting a five-year holding requirement and attaining age 59½.

3 A Roth IRA is tax free as long as investors leave the money in the account for at least 5 years and are 59 1/2 or older when they take distributions or meet another qualifying event, such as death, disability or purchase of a first home.