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Mike Whelen, CPA, Tax Director

Q: Do the new tax laws change the thinking on Roth IRAs?

There are several good reasons to contribute to a Roth IRA, and the Tax Cuts and Jobs Act (TCJA) make it a little more attractive. The Roth IRA allows individuals to make a nondeductible contribution now in exchange for tax-free growth and tax-free distributions. In 2020, the ability to contribute starts to phase out at $196,000 for married couples and $124,000 for single individuals.

Individuals above these limits can convert their regular IRA to a Roth IRA. In exchange for paying tax on the conversion, they will also enjoy the tax-free Roth benefits. The TCJA lowered individual income tax rates, therefore, converting to Roth is now less costly. These lower rates will expire Dec. 31, 2025, and it is widely believed that tax rates will increase in 2026 due to higher government deficits and a changing political climate. With higher tax rates, the tax-free distributions of the Roth owner will be even more valuable.

The Roth IRA greatly benefits younger individuals since they have more years of tax-free appreciation. Of course, these individuals tend to have the least amount of money to invest. Consider gifting a Roth contribution to your children who are starting to receive their first paychecks. If your child made under $32,500, and was not a full-time student during the year, they will be eligible for a Form 8880 Saver’s Tax Credit on their Roth contribution.

Have a Question?

To learn more about how your Roth IRA may be affected by new tax laws, contact our tax advisors today.