Great News: Roth IRA Investments Are Immune to These 2 Tax Rules

As a retiree, the last thing you want to do is spend a lot of time worrying about IRS rules. But, there are a few key tax requirements that can have a major impact on the amount of money you’ll have in your later years.

If you invest in a Roth IRA, however, you likely won’t need to worry about either of the two most important IRS regulations applicable to retirees. Here are the rules that Roth IRAs can make you immune to.

Image source: Getty Images.

1. Rules for when Social Security becomes taxable

The rules for when Social Security benefits become subject to federal tax are somewhat complicated. Here’s how they work:

You’re taxed on up to 50% of your benefits if your provisional income is $25,000 as a single filer or $32,000 as a married joint filer.
You’re taxed on up to 85% of your benefits if your provisional income exceeds $34,000 for single filers or $44,000 for married joint filers.

But here’s the confusing part: Provisional income isn’t all income. It’s half your Social Security benefits, some non-taxable income (including MUNI bond interest), and all taxable income.

If your income comes from Social Security and a Roth IRA, you likely aren’t going to have to worry about this. That’s because Roth income isn’t taxable, it doesn’t count when provisional income is calculated, and it therefore can’t render your benefits subject to tax. If your only income is from a Roth IRA and from Social Security, it’s unlikely you’ll hit the income levels that would necessitate paying taxes on benefits.

2. Required minimum distribution rules

If you have a traditional 401(k) or IRA; a Roth 401(k); or most other types of tax-advantaged retirement accounts, you also need to understand how Required Minimum Distribution (RMD) rules work.

RMD rules mandate you begin taking withdrawals from your investment accounts after age of 72. You’ll need to use the tables and worksheets the IRS provides to calculate exactly how much money you must withdraw from your accounts each year. And if you fail to fulfill the mandate and take the necessary distribution, you’re subject to a huge financial penalty equaling 50% of the amount you should have withdrawn.

The good news is, Roth IRAs don’t come with an RMD requirement. You aren’t going to have to take out a specific amount of money on a schedule determined by the IRS. You won’t have to do the complicated calculations each year to determine the amount of your RMD, nor will you need to withdraw money from a retirement account that you would prefer to keep invested.

Without RMD rules, you’re free to let your Roth funds grow and you can leave your account to heirs if you’d prefer not to spend all of the money in it. This alone is a major benefit. And when coupled with the fact that you also can take as much money out of your Roth as you want without rendering Social Security benefits taxable, it’s easy to see why Roth accounts may be a great choice for retirees.

The $16,728 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *