Why You Need a Roth IRA

cropped view of senior woman writing in notebook with roth ira and traditional ira words

Do you like paying taxes? Of course not – I don’t think I’ve ever met a nurse practitioner who does! But if you’re not fond of them now, then I’ve got news for you: You’re really going to HATE paying taxes a whole lot more someday when you’re retired with no working income. 

Fortunately, the IRS gives savers a way to reduce their future tax bills by using what’s called Roth-style accounts. Essentially, these types of accounts work the opposite of traditional-style retirement accounts – instead of deferring your taxes for later, you’ll pay them now so that you can enjoy sweet, tax-free income later on in life. 

Roth-style accounts were introduced back in 1997 with the introduction of the Roth IRA. Since then they’ve become so popular that now most 401k plans also have a Roth option. But the interest doesn’t stop there. Wealth managers across the country are helping their clients to find creative ways to move as much of their nest eggs as possible away from their tax-deferred retirement buckets and into their tax-free retirement buckets using Roths. So as the old saying goes: Where there’s smoke, there’s usually fire. 

Why You Should Consider a Roth

I can understand why many people might dismiss Roth-style accounts at first. Nurse practitioners make a healthy living (most of the time) and are generally in higher tax brackets than the rest of the public (especially if you are a practice owner). So why would we want to pay more taxes right now than we have to?

To that argument, I would say THINK ABOUT THE LONG TERM. Here are at least five good reasons why you’d want to pay the IRS now and leverage a Roth to your advantage.

1. You Might Enter into an Even Higher Tax Bracket

You might think you’re making a lot of money now. But what happens if you’re doing everything right, being as financially redundant as possible, and your nest egg grows to more than you imagined? What a fun problem to have!

Of course, the more money you’re able to enjoy in retirement also means potentially more taxable income for the IRS. So a Roth would help you to mitigate this.  

2. Lower RMDs

Even if you plan on living modestly in retirement and barely touching your retirement accounts, the IRS has other plans for you. 

Starting the year you turn 72 years old, they will begin forcing you to take out a certain amount of money called an RMD (required minimum distributions). More or less, they’re tired of letting you defer your taxes and so they impose these RMDs as a way to guarantee you’ll make withdrawals. The penalty for not doing so is an obnoxious 50 percent! 

But with Roth-style accounts, there are no RMDs. Since you’ve already been taxed on that money, you get to decide when you’d like to use it.

3. Tax Rates Could Change

As I’ve said before, taxes will be the biggest expense in your life. And the grand mistake everyone makes with tax planning is assuming that tax rates will be the same as they are right now. I hate to seem pessimistic, but that’s not likely to happen. 

Today’s top tax brackets are some of the lowest they’ve been in the past 100 years. Given the dire state of our national debt and federal programs like Social Security, there are almost certainly going to be tax changes imposed that won’t be in our favor. So why not use Roths to get a free pass right now?

4. Social Security and Medicare Premiums 

A lot of people don’t realize this, but if your taxable income is low enough, then you might possibly qualify for tax-free benefits. On top of that, Medicare premiums will be lower too. 

How does one enjoy a comfortable retirement but have a low taxable income? By having as much money in their Roth bucket to draw from.

5. Tax-Free Transfer to Your Beneficiaries

Finally, leaving wealth behind for your loved ones and future generations can be one of the most selfless gifts ever. But if that money is in traditional-style accounts, it will be susceptible to complicated draw-down rules and taxes. On the other hand, Roth-style accounts will have far less of both.

But Aren’t There Income Limits to Roth IRAs?

Yes, there are. You can find the latest phase-out limits on the IRS’s website here. But don’t let that stop you …

For high-income earners, there’s a technique you can use called a Backdoor Roth IRA. This is basically where you fund a non-deductible IRA or take the funds from your other traditional retirement accounts and then convert them into a Roth instead. This works whether you’re working for an employer or have gone into business for yourself. I do this regularly as I am in a high enough tax bracket to where I cannot contribute to a Roth IRA in a traditional sense, so I have to do the “backdoor” way, which is perfectly legal just FYI.

In other words, nurse practitioners have lots of ways they can take advantage of these Roth-style retirement plans. So, DO YOUR FUTURE SELF A FAVOR and start erasing your tax bill now! As a nurse practitioner entrepreneur, you really should make lowering your tax obligations one of your TOP priorities. I think it is foolish not to as it is the biggest expense in your life and using Roth IRAs are just one strategy out of many to do just that.

3 Responses

  1. Great article! As an entrepreneur, do you make the annual Roth contribution using your business or personal account?

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