How Much Will a Roth IRA Lower My Taxes?

Roth IRAs have many advantages, but tax relief isn’t one of them, at least not immediately. Down the road, a Roth IRA can save you money. You don’t have to pay taxes on the money withdrawn from Roth IRAs when you reach retirement age, which can be a powerful tool for lowering your tax bill. So, if you don’t need a fast deduction, consider the advantages Roth IRAs offer.

Unlike other types of IRAs and 401(k)s, Roth IRAs are funded with after-tax money, not pretax dollars. There is no Roth IRA contribution deduction, so you’re giving up the instant gratification tax break for one that benefits you over the long haul.

You may contribute up to ​$6,000 ​annually to your Roth IRA if you are ​under 50​, and ​$7,000​ annually after you pass the half-century mark, as long as you earned that much in income. If you open an IRA account to reduce taxes immediately, make sure it's a traditional IRA, where contributions are deductible, not a Roth account.

If you work past the age of ​70 1/2​, you can continue to contribute to a Roth IRA. That’s not the case with a traditional IRA. Unlike other IRAs, you can withdraw your Roth IRA savings at any time without penalty, although you have to pay a fee for withdrawing the earnings on your Roth IRA before age ​59 1/2​.

Qualifying reasons that save you the fee include paying for family college expenses, paying for a first-time home purchase with up to ​$10,000​, and paying for medical expenses that total more than ​10 percent​ of your annual income.

Another plus for Roth IRAs is that you don’t have to tap them at all if you don’t need the money. That’s not the case with traditional and other forms of IRAs or 401(k)s. The IRS requires withdrawals to start from these accounts by the time you reach the age of ​70 1/2​. You pay taxes on the withdrawals at your normal tax rate, which is usually lower in retirement.

If you want to take withdrawals from your Roth IRA, you can start doing so at ​age 59 1/2​, as long as you’ve had the account open for ​at least five years​. Those distributions won’t cost you a dime in taxes, including the earnings in the account consisting of distributions and capital gains. There's no Roth IRA tax deduction, but you are potentially saving tax money by receiving these distributions, including earnings, tax free.

Not everyone can open a Roth IRA. Adjusted gross income limits apply. After a certain point, you're not longer eligible to contribute. These exact limitations change from year to year.

There is one exception to prompt tax savings on your Roth IRA, and it occurs if you qualify for and use the Retirement Saver’s Credit, available for relatively low income taxpayers.

If you don’t have a retirement plan at work, it makes sense to contribute money to a traditional IRA, since that money is also deductible. However, if you are covered by an employer’s retirement plan, you can contribute to a Roth IRA and take the saver’s credit.

For ​2020​, if you’re single, head of household or married filing separately, you can make a full Roth IRA contribution if your AGI is less than ​$124,000​. You can still make a partial contribution if your AGI is between ​$124,000​ and ​$139,000​. If you are married filing jointly, you and your spouse can make full Roth IRA contributions if your AGI is under ​$196,000​. If your AGI is between ​$196,000​ and ​$206,000​, you can each make a partial contribution.

And for ​2020​, single filers with an AGI of up to ​$19,500​ and married people filing jointly with an AGI of ​$39,000​ or less are eligible for the savers' credit on up to half of their retirement contributions for the year. Those with slightly higher AGIs may prove eligible for ​10 or 20 percent​ of their retirement savings contribution.