In pursuit of tax-free opportunities: Roth IRAs

Roth IRAs are tax-advantaged accounts that can hold many different types of assets and investments. Unlike Traditional IRAs, which offer pre-tax contributions and tax-deferred growth potential, Roth IRAs have taxable contributions with tax-free growth potential. Distributions are tax-free, too, as long as the investor is age 59½ or older and has owned the IRA for at least five years. As an added bonus, there is no minimum distribution requirement for Roth IRAs, so the money has the potential to grow and compound tax-free for decades.

Earn too much to contribute to a Roth?

If you expect to be in the same or a higher income tax bracket during retirement, a Roth IRA may be a particularly attractive option. However, not everyone can make contributions to one. Roth IRAs have income limitations. For the 2015 tax year:

Single individuals, heads of households, or married couples (filing separately) who earn $116,000 up to $131,000 can contribute a reduced amount to a Roth IRA. If they earn more than $131,000, they are not eligible to contribute to a Roth IRA.

Married couples, filing jointly, or qualifying widow(er) who earn $183,000 up to $193,000 can contribute a reduced amount to a Roth IRA. If they earn more than $193,000, they are not eligible to contribute to a Roth IRA.

While income determines whether a person can contribute to a Roth IRA, it has no bearing on Roth ownership. As a result, anyone of any income level can have a Roth IRA. And, because of that, there are ways for high-income earners to reap the benefits of Roth IRAs without making contributions directly.

Rollovers to Roth IRAs

In 2010, the income limits that prevented high earners from rolling assets out of Traditional IRAs and into Roth IRAs were removed. As a result, Americans can make contributions to Traditional IRAs and then rollover those assets into Roth IRAs. When this happens, the taxpayer will owe taxes on the amount of the rollover.

For 2015, taxpayers can contribute up to a maximum of $5,500 to IRAs. If you are age 50 or older, you can contribute up to $6,500 for the year.10

Contribute to a Roth 401(k), 403(b), or 457(b) plan

Some companies and organizations allow participants in 401(k), 403(b), or 457(b) plans to make contributions to designated Roth accounts. The contributions are taxable, but any earnings grow tax-free and distributions are tax-free as long as certain requirements are met. A key difference between designated Roth accounts and Roth IRAs is required minimum distributions must be taken from Roth plan accounts at age 70½.

While it is permissible to divide your annual plan contribution between designated Roth 401(k) contributions and traditional pre-tax 401(k) contributions, the total contribution amount cannot exceed $18,000 for 2015. If you are age 50 or older, you may be able to contribute an additional $6,000 to an employer’s plan this year.11

If you’re passionate about taxes and would prefer to have tax-free income during retirement, ask your financial advisor about Roth strategies and how they may benefit you.

Securities offered through LPL, Member FINRA/SIPC.  Investment advice offered through Private Advisor Group, a registered investment advisor.  Private Advisor Group and Antoine Williams & Associates Financial Services are separate entities from LPL Financial.

This material was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.