3 Smart Ways Baby Boomers Are Using Roth IRAs

By Todd Campbell Markets Fool.com

Roth IRAs are one of the best retirement planning tools available to baby boomers, and if you're considering investing in a Roth IRA, there are a number of strategies that you can use to get the most out of one. Do you know them all?

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The Motley Fool's IRA Centeris a fantastic resource for you to learn all you need to know about IRAs and retirement, but in the meantime, read on to learn three money-boosting ways your peers are using Roth IRAs to get off on the right foot.

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No. 1: Lowering taxes in retirement

Roth IRAs are funded with after-tax dollars, and as long as these accounts have been open for at least five years and the account owner is at least 59 1/2 years old, money can be withdrawn from these accounts tax- and penalty-free, including gains from investments.

Baby boomers who expect to pay a higher income tax rate in retirement can lower their lifetime tax burden by paying taxes on income during their working years and then contributing to Roth IRAs.

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Furthermore, converting existing traditional IRAs to Roth IRAs can result in lower lifetime taxes, too. These conversions can be complex, but they can be a useful part of tax-planning strategies, especially for high-income earning workers.

Roth IRA income limits prohibit many high-income earners from using them. However, post-tax contributions can be made to traditional IRAs regardless of income, and those contributions can be converted to a Roth IRA to circumvent the IRS income limits.

This backdoor approach isn't right for everyone, and there are specific rules to follow to stay in the IRS' good graces, so discuss the implications thoroughly with your tax advisor before embracing this strategy.

If you're a high-income baby boomer, it may also pay off to sit down with your human resource department to find out if they offer a Roth 401(k). In some cases, income limits don't apply to Roth 401(k) plans, allowing you to contribute significantly more after-tax money than you can contribute to a Roth IRA.

No. 2: Increasing estate size

As long as you have some earnings from work, you can contribute to a Roth IRA as long as you live. That's a big advantage over traditional IRAs, which prohibit contributions and require minimum distributions at age 70 1/2.

Because Roth IRAs aren't subject to distribution requirements, baby boomers who continue working in retirement -- and whose income is below Roth IRA income limits -- can stash away up to $5,500 per year in 2017, plus a $1,000 catch-up contribution that is available for those age 50 or older.

Those contributions can really add up. A 66-year-old retiree who earns enough to contribute the maximum $6,500 per year into a Roth IRA could end up with an additional $151,294.74 at age 81, if he or she earns 6% returns annually.

No. 3: Stretching inheritances

Roth IRAs provide baby boomers with significant legacy-planning advantages, including the ability for Roth IRA beneficiaries to stretch distributions over their lifetime.

Typically, beneficiaries must begin withdrawing money from inherited Roth IRAs or face stiff penalties, but rules allow those distributions to be made over time, rather than all at once.

For example, if your beneficiary is a spouse, then your Roth IRA can be rolled automatically into a Roth IRA for them, and they won't need to take any distributions over their lifetime if they're the sole beneficiary. When your spouse passes away, their beneficiary can then elect to begin taking distributions based on their own life expectancy. Depending on the age of your spouse and your spouse's beneficiary, this could stretch the usefulness of a Roth IRA out decades beyond your own death.

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