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WHEN MOST PEOPLE think of Roth IRAs or Roth 401(k)s, they just think “tax-free withdrawals.” But that’s only part of the story.
Roth accounts can protect you from financial traps that catch many retirees off guard. Here are five key advantages to keep in mind:
1. Tax Rate Protection
One thing we can’t control is future tax rates.
Did you know that in the 1980s, the highest federal tax rate was 50%? In the 1970s, it was 70%, and in the 1960s, it was as high as 91%.
Right now, we’re living in an era of historically low tax rates, but that may or may not last forever. We know that in 2025, the federal deficit was ~$1.8 trillion, and raising taxes could be one of the few ways to close that gap.
That’s where Roth accounts could be good to diversify with. You pay taxes now and lock in today’s rates, no matter what happens in the future.
However, Roth contributions aren’t automatically the best move for everyone. It depends on your marginal tax rate today versus your expected rate in retirement. The expected one is harder to predict, and generally, using today’s rates could be a good starting point.
It’s not about which account is “better”, it’s about which one fits your long-term tax outlook.
2. Social Security Taxation
Once you start receiving Social Security income, a portion of your benefits could become taxable, depending on your other income sources.
The IRS uses something called “provisional income” to determine how much of your benefits are taxed. It includes:
If you’re single and your provisional income is below $25,000, your Social Security is 100% tax-free. Between $25,000 and $34,000, up to 50% of your benefits are taxed. Above $34,000, up to 85% may be taxable.
For married couples, those thresholds are $32,000 and $44,000.
The key advantage: Roth withdrawals do not count toward provisional income. That means you can tap your Roth IRA or Roth 401(k) in retirement without increasing your Social Security tax bill.
3. Medicare Premiums
Once you enroll in Medicare, your Part B and Part D premiums are based on your income.
If your income exceeds $106,000 (single) or $212,000 (married filing jointly), you’ll face higher premiums under the IRMAA rules.
The more income you have, the higher your premiums. At the top levels, they can almost triple.
The good news is that Roth IRA withdrawals don’t count toward that income calculation. So by using Roth funds in retirement, you can avoid Medicare surcharges and keep your healthcare costs lower.
4. Required Minimum Distributions (RMDs)
Traditional IRAs and 401(k)s eventually force you to take withdrawals, even if you don’t need the money.
Generally, starting at age 73, you must take Required Minimum Distributions (RMDs) each year, and those withdrawals are taxable. They can also push you into a higher bracket, make more of your Social Security taxable, and even raise your Medicare premiums.
Roth IRAs have no RMDs during your lifetime.
That means you control when to withdraw, not the IRS, allowing your money to grow tax-free as long as you want.
5. Early Withdrawal Penalty
When you withdraw from a 401(k) or traditional IRA early, you have to pay a 10% penalty along with taxes on the amount withdrawn (unless an exception applies, such as Rule of 55 or SoSEPP)
For Roth accounts, the rules are different. With a Roth IRA, you can always withdraw your contributions (not earnings) at any time, completely tax- and penalty-free.
However, the same does not apply to a Roth 401(k). If you withdraw funds from a Roth 401(k) before age 59½, each withdrawal is pro rata, meaning a portion is treated as contributions and a portion as earnings. The earnings portion will be taxed and penalized.
This treatment differs once you roll over your Roth 401(k) into a Roth IRA. After the rollover, your payroll contributions and earnings are logically separated. There’s no 5-year waiting period for accessing your rolled-over contributions, because a rollover from Roth to Roth is not a conversion.
So, if you want early access flexibility, moving your Roth 401(k) funds into a Roth IRA after leaving your employer can be a smart move.
And if your income is too high for a direct Roth IRA contribution, you can still get in through the Backdoor Roth strategy.
Be Smart
Roth accounts offer tremendous flexibility and long-term tax benefits, but that doesn’t mean everyone should contribute.
The real key is understanding your marginal tax rate today versus what it’s likely to be in retirement.
If you’re in a high bracket now, it may make more sense to take the deduction today through a traditional IRA or 401(k), and convert to a Roth later when your income (and tax rate) is lower, a strategy known as a Roth conversion.
On the other hand, if you’re in a low bracket now, for example, early in your career or between jobs, paying taxes upfront through a Roth contribution could save you far more over time.
Final Thoughts
Roth accounts can shield you from rising taxes, Social Security taxation, Medicare surcharges, RMDs, and early withdrawal penalties, but the biggest advantage comes from using them strategically. Don’t contribute just because “tax-free = good”.
Run the numbers, compare your current and future rates, and build a mix of pre-tax and Roth savings that gives you flexibility no matter what tax policy looks like in the future.
In the end, true tax planning isn’t about predicting the future. It’s about positioning yourself to win under any scenario.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
SoSEPP?
I’ve been taking advantage of the years between retirement, Social Security, and RMDs kicking in to make Roth conversions. I was looking for a Roth tax calculator that factors in paying taxes from the Roth versus using after-tax dollars (I’ve done it both ways). I know that after tax dollars are preferred, but I want to actually see the numbers without having to go the TurboTax route. Anyone found one? Thanks.
You can create one for yourself in excel by following the guidance and examples in this article:
https://www.capitafinancialnetwork.com/education-center/to-roth-or-not-to-roth-that-is-the-question
I use Boldin as one tool in my arsenal for Retirement Planning:
https://www.boldin.com/
Outside of the paid functionality of the above website they do have a stand-alone Roth Conversion calculator:
https://www.boldin.com/retirement/roth-conversion-calculator/
The stand-alone version is less awesome from what you get in the paid subscription. In the paid subscription you have the ability to tie in most of the financial factors of your life enabling a more holistic view, allowing you to better predict the impact of conversion options over time.
But maybe the stand-alone version will help a little…
I did a bunch of conversions to create an account for LTC with my eff tax rate in Florida at 20% on around 400k in income
Well Bogdan, you may have listed some benefits, but how about the detriments? Here is one you can start with: The Roth IRA is the only investment that I know of, where you can actually lose more that your original investment. How? If your investment value goes to zero after you have converted to a Roth, you cannot claw back the taxes you have paid to do the conversion. Per your last statement: “It’s about positioning yourself to win under any scenario.” I think it is misleading. As an investor, I always look at the worst case,,,
Very good summary of the benefits, but insufficient discussion of instances when it might be detrimental. I’m a big fan of Roth’s, but it might be useful to consider a follow on article about when it might be a better idea to have (a larger sum of) money in a tax deferred investment. Essentially, when the intended use of the funds indicates there’s a reasonable chance that the taxes at withdrawal will be less than the taxes if prepaid, so having the most funds available is the desired outcome. This would possibly include funds intended for: self-funding LTC, a disabled child, a spend-thrift child, a spouse not eligible for survivor benefits where income might drop precipitously if widowed, charity donation, etc. I bet the HD community could come up with some instances I hadn’t considered.
Thank you, Bogdan, this was good. We weren’t able to take advantage of Roth accounts until later, but the flexibility of having them we hope will help in later years or if our kids inherit them. Chris
However you sugar coat it, Roth conversions are still a wager based on many assumptions. One is paying taxes early in the hopes of a benefit later. There is some consensus that filling up low tax brackets is a good bet and for wealthy retirees for estate planning purposes. Less clear for those in the middle.
With a $38 trillion outstanding public debt that’s still growing (and not sustainable), a smart gambler would like the Roth’s odds.
For me, Roth’s benefit came into sharp focus when I re-ran the math for our own situation using tax brackets for single filing. Odds are I will die before my spouse. I really don’t want to stick her with a much higher tax bill.
I agree about calculating the situation for the surviving spouse, for taxes and other aspects of retirement finances.
These are great points, Bogdan. I think Kurt offers an equally great point–tax free inheritance. If our heirs are in different tax situations, we can even direct the tax free inheritance to the one who benefits most while compensating for this benefit in the amount given to the one(s) in lower tax brackets. (Traditional IRAS and 401ks result in tax burdens for the heirs in contrast to unsheltered assets and roth accounts.)
One item I might demote–increased taxes on social security and increased premiums for medicare. For people like me who face them, they actually are small issues, even though they are a bit cliff-like in nature. Since savers will be savers, if we have large accounts we will probably have ongoing high taxable incomes in retirement, unlike some of our peers who had higher incomes (and spent them) while working.
Good article. I have just one caveat; just as they changed the withdrawal period for inherited Roth to ten years, the government could change any aspect of the current Roth program. I am a big user of Roth, but the government of the US is sovereign. They could put a limit on balances in Roth, or just end the option.
On topics such as this, Jonathan noted politicians like to be re-elected. Changing the terms of Roth accounts would be like changing Social Security benefits for those already receiving them: a likely way for voters to make a change.
I think this list covers well the main considerations. However, if you expand the scope to include the financial traps of those who receive your inheritance, then Roth alleviates the tax burden for them. It also simplifies how they use the money, giving them more options. If you are near or in the retirement stage, then you may find the scope goes beyond your immediate needs.