Consider Roth for Tax-Free Income

The adage “pay me now or pay me later” applies to the differences between traditional and Roth accounts in both IRAs and employer retirement savings plans. Traditional accounts (pay me later) offer a current-year tax deduction, but future withdrawals, including contributions and earnings, are subject to ordinary income tax.

On the other hand, Roth accounts (pay me now) offer no current tax benefit — so you are using funds that have already been taxed — but withdrawal amounts attributable to contributions can always be withdrawn tax-free, and earnings can be withdrawn tax-free as long as they meet certain conditions (see below). Unlike traditional accounts, there are no required minimum distributions for original owners of Roth accounts, so funds can continue to pursue growth, providing flexibility for retirement income and estate planning.

Tax brackets and time frames

Roth accounts are often recommended for younger people, who may be in a lower tax bracket — making the current-year deduction of a traditional account less valuable — and have a longer time frame to benefit from tax-free growth. Obviously, older people could also benefit from tax-free retirement income, but whether it’s better to contribute to a traditional or Roth account, or to convert traditional assets to Roth assets, requires a cost-benefit analysis.

If you are in a high tax bracket now, the current-year deduction for traditional contributions might be more appealing than tax-free retirement income. But if you expect to be in the same or higher tax bracket in retirement, Roth contributions or conversions could make sense. It’s also important to keep in mind that retirement can last a long time. A 65-year-old retiring today might spend 20 or 30 years in retirement, giving Roth assets plenty of time to pursue tax-free growth, potentially providing benefits greater than the current tax cost.

Contributions and conversions

If you are still working, you might consider splitting your contributions to an employer plan or IRA between traditional and Roth accounts (if your employer offers a Roth option). Contribution limits apply to combined accounts. If you are 50 or older in 2025, you can contribute $31,000 combined to traditional and Roth 401(k)s ($34,750 if you reach age 60 to 63 in 2025) and $8,000 combined to traditional and Roth IRAs.

You can build a bigger Roth nest egg by converting traditional assets from an IRA and/or employer account. Converted assets are subject to federal income tax in the year of conversion and may also be subject to state taxes. This could result in a substantial tax bill and might move you into a higher tax bracket. One strategy is to “fill your bracket” by converting only the amount that would keep you in the same bracket. This requires projecting your income for the year.

Income Limits

The ability to deduct contributions to a traditional IRA if you participate in a workplace plan or to make contributions to a Roth IRA regardless of participation phases out at the following modified adjusted gross income (MAGI) ranges in 2025.

                                                                                     Federal tax filing status

*Deductible contributions for a spouse who is not covered by a plan but filing jointly with a spouse who is covered phase out at $236,000–$246,000.

Two five-year tests

Roth accounts are subject to two different five-year holding requirements: one related to withdrawals of earnings and the other related to amounts converted.

For a tax-free and penalty-free withdrawal of earnings, a Roth account must meet a five-year holding period beginning on January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for a conversion or late in your career.

Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time (because you paid taxes at the time of the conversion), but a 10% penalty may apply to the converted amount if you withdraw the assets before the end of a different five-year period, which begins on January 1 of the year of the conversion, unless you are age 59½ or another exception applies. Each conversion is subject to a separate five-year holding period.

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2025 Broadridge Financial Solutions, Inc.