We all know Roth IRA’s allow for tax free growth.  But how will a Roth IRA impact your retirement?  We’ll take a look at a couple of real life examples to show you the real value of these accounts.

Video: How Would A Roth IRA Impact Your Retirement?

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The Common Example.

Every advisor has used this example at some point in time.  But it doesn’t provide any practical answers.

The Impact Example 1 - Monthly Income

Here is what we typically see. People retire. They have this pile of money, and they need to get some income each month. In most cases, at least to this point in time, the money has been in the traditional 401(k) or IRA accounts.

They set up monthly distributions from their accounts. But most people don’t like to pay quarterly tax estimates. So they have taxes withheld from those withdrawals.

So if we use the $600,000 accumulation from the first graph, and use the 4% rule, it works out to a gross monthly income of $2,000.  Here is how we see this work in real life.

But with the Roth IRA, there are no taxes.  You get to keep the entire distribution.  

Over time, the impact of this can be huge.  Over the course of 23 years, the amount of taxes you pay can be significant.

Let’s say you start at $2,000 per month.  You increase it each year for inflation.  Over 23 years, you’ll take total distributions of $750,000.  Of that, $150,000 would go to the state and federal government.  With the Roth, it all stays in your pocket.  That’s a pretty big impact.

 

The Impact Example 2 - Large One-Time Distributions

Here is the second way a Roth IRA would impact your retirement.  People will often need to take a larger one time distribution from their IRA. Maybe it is a car purchase, or a major home repair, or a vacation. They may call and need $10,000.

 If that money comes from a traditional IRA or 401(k), we  often have to “gross up” the distribution. They want to NET $10,000. That means we have to increase the amount they take out to cover thetaxes.   In this example, to get $10,000 they have to actually withdraw $12,500. The government gets that $2,500.

But if you use a Roth IRA, you take out $10,000 and the $2,500 stays in your account.

The Impact Example 3 - Required Minimum Distributions

We still see people who don’t depend on their IRA’s for income. And then they get to age 70 1/2 and get a nice tax surprise.

If the money is in a Roth, no tax surprise.

This also impacts inherited IRAs. You do have to take money from an inherited roth account. But unlike the inherited IRA, you don’t have to pay taxes on those withdrawals.

At least your kids will be glad you have the Roth IRA to pass on to them.

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