Roth IRA and Roth 401(K) planning strategies

Roth IRA accounts and Roth 401(K) plans are retirement accounts funded with after-tax dollars that grow tax free and provide tax-free qualified distributions.

A qualified distribution is any distribution from a Roth IRA that is made after a five-year holding period beginning with the first taxable year for which a contribution was made to a Roth IRA, and the distribution is made on or after age 59½. Distributions that are not qualified are subject to income tax and a 10% early withdrawal penalty on the earnings portion of the distribution, but not the contributions.

Anyone who has earned income can contribute to a Roth IRA, as long as they meet certain requirements concerning filing status and modified adjusted gross income (MAGI). Those whose annual income is above a certain amount, which the IRS adjusts periodically, become ineligible to contribute directly to a Roth IRA, but may still be eligible to contribute to Roth 401(k) plans or make a backdoor Roth IRA contribution.

Even without a current tax deduction, Roth IRA and Roth 401(k) strategies are effective strategies to create long-term tax-free growth, with significant retirement and estate planning advantages. 

Advantages of tax free Roth plans over taxable accounts

  • Same investment options. The investment options and insured account balance options are the same, depending on the plan custodian, for taxable accounts and Roth plans.  
  • Liability protection.  Taxable accounts are usually subject to lawsuits and not exempt from bankruptcy proceedings. Roth IRA assets are often protected from lawsuits and exempt from bankruptcy filings, depending on state law. Employer-sponsored 401(k) plans, including Roth contributions, are safe from lawsuits. 
  • No tax reporting. In a taxable account, investment income is reported annually on the individual’s tax return, including short-term gains, interest, dividends, long-term capital gains, and sometimes K-1 reported income, which can be onerous to collect and report. Roth accounts do not require annual reporting. 
  • Tax free. Taxable accounts are required to pay tax annually at varying tax rates from the marginal ordinary income rate to preferred capital gain tax rates. Roth accounts accumulate income tax free and qualified distributions are tax free. 

Advantages of tax free Roth plans over tax deferred retirement accounts

  • No age limit. Roth contributions may be made at any age, as long as the owner has earned income, unlike traditional IRA contributions that may not be made after reaching age 70½.
  • No RMDs. There are no annual required minimum distributions (RMDs) similar to pre-tax plans, so Roth plans can continue to grow if distributions are not needed for the Roth owner.
  • Greater tax savings. Tax preparers often focus on the current tax deductions of traditional IRA and 401(K) contributions to reduce current tax liabilities, but financial planners often get more excited about the long-term tax-free growth of Roth IRA and 401(K) designated Roth accounts. As illustrated in the example below, tax-free Roth plans reduce taxes more than tax deferred plans when viewed over the taxpayer’s lifetime. 

Advantages of Roth strategies for estate planning

  • No income tax. Traditional IRAs and pre-tax retirement plans will incur income tax when distributed to non-charitable beneficiaries, but Roth plans will not incur income taxes because the distributions are tax free. 
  • Tax free growth for beneficiaries. Beneficiaries are required to take minimum distributions from a beneficial Roth account over their lifetime. This provides flexibility to take a lump sum or keep funds in the account to continue to grow tax free, and only make minimal distributions.
  • Bypass probate. Roth plans usually transfer at death through a beneficiary designation, and can bypass probate.

Risks and considerations

  • Estate tax. Similar to other assets, Roth plan assets are subject to federal estate tax, although most estates are below the current estate tax exemption.
  • Tax law changes. Tax laws change and it is possible that contributions to Roth plans may be curtailed, which would impact long term planning.
  • Early withdrawal penalty. The earnings portion of non-qualified Roth distributions are subject to income tax and a 10% early withdrawal penalty. The Roth contribution portion is not subject to income tax or an early withdrawal penalty, such as traditional IRAs and pre-tax plans.  


Using common assumptions, this example illustrates how Roth plans can result in more tax savings than traditional IRA and pre-tax retirement plans. 

A taxpayer, age 50 in the 22% federal tax bracket, contributes $7,000 annually to a traditional IRA plan until age 65, when the person retires and begins drawing annual distributions over their lifetime. Taxpayer’s total contributions to the IRA would be $105,000 and the total tax savings from the annual IRA deductions would be $23,100.

Assuming a 7% return on investment until retirement and 5% annually in retirement, the account would grow to $175,903 at retirement, and create an annual annuity for the next 20 years of $14,115. Assuming a 15% federal tax bracket on annual distributions in retirement will result in a marginal annual tax cost of $2,117, or a total tax paid of $42,345 over 20 years, which is 83% higher than the tax deduction savings from the IRA deductions.

Using a Roth IRA, instead of taking the traditional IRA deduction, would yield $0 immediate tax savings, but save $2,117 annually on the tax-free distributions, or $42,345 over 20 years.


Modifying the assumptions will change the results, but in most long-term scenarios, tax-free Roth plans result in less total tax paid than tax deferred plans. Generally, the more the account balance grows, the higher the Roth tax savings will be over pre-tax plans, which makes them particularly attractive for young workers who could benefit from decades of tax-free growth. Roth plans are also good for anyone who expects to be in a higher tax bracket in retirement.

For most taxpayers, the best strategy often includes both pre-tax retirement plan contributions and Roth plan contributions to maximize long-term wealth and tax savings.  Employer sponsored 401(k) plans often have company matching on pre-tax contributions to increase the participants total savings. With both plans available in retirement, advisors can help manage the annual taxable income, while providing the cash flow needed. 

As part of regular tax planning, document client goals, including those around retirement, saving, and other financial objectives. This strategy, and other tax saving strategies, may be part of the roadmap to help achieve client goals.  

To communicate the tax savings for this strategy, calculate the annual growth of the Roth plans and multiply by the marginal tax rate(s). The annual account growth is tax-free income.  

Annual limits and phase-out range 

For 2021, the limit on annual contributions to an IRA (traditional or Roth) remains unchanged at $6,000, plus an additional $1,000 catch-up contribution limit for individuals age 50+.

For 2021, the income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $198,000 to $208,000. 

For 2021, the limit on annual contributions to a 401(k) (pre-tax contributions or designated Roth contributions) account remains unchanged at $19,500, plus an additional $6,500 catch-up contribution limit for individuals age 50+.  

For 2021, the Federal Estate Tax exemption is $11,700,000 per decedent. 

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Editor’s note: This article was originally published on the Intuit Tax Pro Center.

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