1st Quarter 2018

Tax Diversification for Your Savings

One of the main benefits of retirement-savings plans such as a 457 is that your contributions can be made pre-tax. The money grows tax-deferred and isn't taxed until you withdraw it in retirement. But you may also want to diversify your tax situation — similar to diversifying your investments — by saving some money in a Roth IRA or Roth 457 (if available from your employer).

A Roth doesn't deliver an immediate tax break, but you'll be able to withdraw the money tax-free in retirement if certain requirements are met. You can withdraw the contributions to a Roth IRA without taxes or penalties at any time. With the new tax law reducing income-tax rates for many people, now may be a particularly good time to contribute to a Roth.

You can contribute up to $5,500 to a Roth IRA for 2018 (or $6,500 if you'll be age 50 or older by the end of the year). You can contribute the full amount if your adjusted gross income for the year is below $120,000 for singles or $189,000 for joint filers. You can make a partial contribution unless your income is above $135,000 for singles or $199,000 for married couples.

There is no income limit for making Roth 457 contributions, if allowed by your employer's plan. (You can contribute up to $18,500 to a Roth 457 this year, or $24,500 if you're 50 or older.)

Another option, regardless of your income, is to convert money over from a traditional IRA to a Roth. You'll owe taxes on the conversion (except for any portion from nondeductible contributions), but the money will grow tax-free after that — no matter what happens to tax rates in the future.

Being able to access some of your savings tax-free creates valuable flexibility. For example, withdrawals from Roth IRAs and Roth 457s are not included in the calculations for the Medicare high-income surcharge, which boosts Medicare Part B and Part D premiums for people whose adjusted gross income, plus tax-exempt interest income, is more than $85,000 if single or $170,000 if married filing jointly. Roth withdrawals also don't count as income when determining what portion of your Social Security benefits will be taxable. You never have to take required minimum distributions (RMDs) from your own Roth IRAs, so you can keep the money growing in the account even after age 70½. (You have to take RMDs from Roth 457s or Roth 401(k)s after age 70½ if you are no longer working for that employer, but the withdrawals are not taxable. Also, if you inherit a Roth IRA from someone other than your spouse, RMDs are required). See our RMD calculator at www.icmarc.org/rmdcalc for more information.

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