Saving More for Retirement with Roths | Lord Abbett

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Retirement Perspectives

The flexibility of Roth accounts makes them a popular retirement-savings vehicle for a growing number of individuals post–tax reform.


Now that tax reform is in effect, individuals and their advisors may want to rethink how they save for retirement, because lower tax brackets for many could make Roth accounts; IRAs, and 401(k)s more appealing.  So, remember the various Roth options and strategies available (contributions, conversions, back-door Roth, legacy planning, etc.) to maximize the potential for tax-free income.

Roth IRAs
These accounts were named after Senator William Roth (R-DE), and were considered revolutionary when they were first established in 1998. Never before had there been a vehicle that was not subject to minimum distributions and could provide tax-free income.  Subsequently, the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) created Roth 401(k) accounts, first available in 2006, which mirrored many of the features of Roth IRAs

The Investment Company Institute estimates that as of 2016, 21.9 million households owned a Roth IRA.  However, Roth IRAs held “only” $660 billion in assets at the end of 2016, a mere 8% of all IRA assets.  These aforementioned statistics show that although it’s the twentieth anniversary of the Roth IRA, it’s still a relatively untapped market. The future looks bright for Roth IRAs. Due to the Tax Cut and Jobs Act (TCJA), there is an expectation that Roth accounts will be play a bigger part of an investor’s retirement portfolio. It’s important to acknowledge that Roth accounts are even more appealing post-TCJA

Roth accounts offer advisors and their clients a number of strategies, both basic and advanced, that have a variety of benefits, the most appealing being tax-diversification: pretax assets versus tax-free income, thus offering the opportunity to change both contribution and withdrawal strategies, while potentially lowering or eliminating the amount subject to taxes. However, Roth accounts, for all their flexibility and versatility, are subject to a number of rules and regulations that must be adhered to. Below, I will debunk a number of Roth misconceptions, while offering a wide variety of Roth ideas to consider.

  • Although all investors, regardless of income, are eligible to make Roth 401(k) contributions, an annual income test applies to Roth IRAs.  In other words, Roth IRA funding requires that an individual have compensation and satisfy an income threshold as established by the IRS. The earnings limit is based on an investor’s modified adjusted gross income (MAGI).  Participating in an employer-sponsored plan (e.g., 401(k) 403(b), 457(b), SEP, and SIMPLE IRAs, etc.) does not preclude an individual from contributing to a Roth IRA.  That means one’s total Roth contributions for the year can be as much as $24,000, plus $7,000 in age 50-plus catch-up contributions in 2018.

The dollars individuals convert from a traditional IRA or other tax-deferred retirement account are not included in calculating their MAGI to determine Roth IRA eligibility. In other words, a Roth conversion will not prevent anyone from making Roth contributions, assuming their income qualified prior to the conversion.

Tip: An otherwise eligible non-working spouse can establish a Roth IRA based on the working spouse’s earnings via a spousal IRA.

  • The back-door Roth is a “must” for those high-income earners who don’t own an IRA or have smaller balance IRAs.  (See my column on back-door Roths for more information.) There is no minimum age to fund a Roth IRA, either. (See my earlier column on funding Roth for a child.)   Instead, all that is required is earned income.
  • There is no age limit on making contributions to Roth IRAs. Only traditional IRA rules prohibit contributions upon the year in in which an investor turns 70½. Instead, Roth IRA contributions can be made at any age, as long as the accountholder has earned income and satisfies an annual income test. (See my earlier column on funding Roth IRAs for older investors.)
  • For the “mega” back-door Roth, it’s possible, in 2018, to allocate up to $55,000 ($61,000, including the age 50-plus catch up) to a 401(k) through a combination of employee deferrals (Roth and/or pretax), employer contributions (match, profit-sharing), and employee aftertax contributions.  (To learn more about this strategy, click here for a recent column and/or here  to listen to a March webcast where I cover this strategy in detail.)
  • A recharacterization allows an individual to unwind or reverse a Roth IRA conversion. A Roth conversion triggers federal income and state (if applicable) income tax liability, whereas a properly executed recharacterization eliminates the tax liability. Notably, you may be eligible for a refund if taxes were previously paid. Anyone can initiate a recharacterization for any reason.

The TCJA, which went into effective January 1, 2018, eliminated the ability to recharacterize Roth conversions.  In other words, Roth conversions that occur on or after January 1, 2018, are irrecovable. Importantly, the IRS has publicly stated that Roth IRA conversions made in 2017 may be recharacterized if the recharaterization is made by October 15th 2018.

  • Roth IRA account owners and surviving spouses are not subject to lifetime RMDs, while Roth 401(k)/403(b) accounts are subject to lifetime RMDs. However, a plan participant could rollover his/her Roth balance prior to 70½ to a Roth IRA, thus avoiding all RMDs.  Those individuals age 70½ and subject to plan RMDs can also rollover to a Roth IRA; however, their RMD must be taken prior to the rollover.
  • Roth IRAs can be a terrific estate-planning tool, providing potential tax-free payouts to heirs for their lifetimes—and, in some cases, beyond. How much control the beneficiary has over the inherited Roth IRA depends on the status of the inheritor. In general, beneficiaries who inherit from their spouses have more or less carte blanche with regard to what they do with the money. Not so with non-spousal beneficiaries, who are subject to a litany of strict rules. Notably, a Roth IRA inherited by a non-spouse beneficiary is subject to RMDs. However, via the “stretch” option, RMD amounts for a non-spouse are determined using the life expectancy of the beneficiary and generally are tax-free income. This allows a beneficiary to potentially stretch tax-free income over decades!

Tip: A non-spouse beneficiary who inherits a traditional IRA (including SEP and SIMPLE) cannot convert the account to a Roth IRA; only a spouse is permitted to do so.  It is interesting, however, that a non-spouse beneficiary who inherits an employer plan (e.g., 401(k)) can convert those accounts directly to a Roth IRA.

  • An investor can withdraw his/her contributions (basis) from a Roth IRA at any time and age without being assessed taxes and/or early-withdrawal penalties.  For example, a teenager can take a distribution of basis to pay for his/her college education, or anything for that matter, without being subject to tax and/or penalties. Since the distribution is tax-free, it is not reported on the child’s tax return.  In addition, there is an exception to the 10% early distribution penalty for higher-education expenses for a student who dips into earnings to pay for college.

In order to withdraw Roth IRA earnings tax- and penalty-free (referred to as a “qualified distribution”), individuals must satisfy the following: 1) attain age 59½, death, or disability, and 2) meet the five-year holding period.

Tip: The five-year clock starts on January 1 of the year you make your first Roth contribution.

Like Roth IRAs, qualified distributions from Roth 401ks, 403(b)s, or 457(b)s are not subject to income tax.  Also like Roth IRAs, the five-year holding period runs from the date the first contribution is made to the designated Roth 401(k) account. However, the five-year period is per plan.  In other words, it does not include another Roth 401(k)—e.g., from a former employer—unless there are rollover funds.

If you have any questions about this or another retirement topic, please e-mail me at

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.


Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP IRA.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an after-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.



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