Roth IRAs are funded with money you've already paid income tax on, but you won't have to pay taxes (e.g., on capital gains) again when you withdraw from a Roth IRA, as long as you're 59.5 years old and have held the IRA for at least 5 years by the time of withdrawal. But, there's an income limitation for Roth IRA contributions – you typically need to make under $120,000 (filing statuses: single, head of household, or married filing separately and did not live with your spouse during the year) to qualify for the full annual contribution. More info here on income limitation for Roth IRA.
While there is no income limitation for Traditional IRA contributions, there is an income limiation for tax-deductible contributions if you or your spouse is covered by a workplace plan. If you make contributions to a Traditional IRA with "pre-tax" dollars, you may take a deduction from your income for contributions made to a Traditional IRA. Keep in mind you have to take the tax deduction yourself on your tax return or work with your tax preparer. However, withdrawals (aka "Distributions") from a Traditional IRA are subject to taxes at your tax bracket and at the time of withdrawal. If you anticipate being in a significantly lower income tax bracket by the time you withdraw funds from your Traditional IRA, this can work out in your favor.
Traditional IRAs also have Required Minimum Distributions ("RMD") during your lifetime, more info here. Roth IRAs do not have RMD requirements.
Everyone's tax situation is different, so it's important to spend some time with your tax advisor to make sure you understand your situation clearly.
If after considering your current and anticipated future income and tax circumstances, and you decide that you prefer to have your retirement funds in a Roth IRA, but you currently exceed the income limit for Roth IRA contributions, then you can consider a Traditional IRA to Roth IRA conversion (aka "Backdoor IRA Conversion"). We offer IRA Conversions as part of our Tax Protection package’s IRAutomation feature.
- Learn more about Tax Protection in our dashboard
- FAQ: How does a Roth IRA conversion work?
- FAQ: What are the benefits of a Roth IRA conversion?
- FAQ: What considerations are there for a Traditional to Roth IRA Conversion?
- FAQ: Is Tax Protection right for me?
Axos Invest is not a tax advisor and this should not be construed as tax advice. Please consult your tax advisor before making any tax-related decisions.