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The Taxpayer Relief Act of 1997 greatly increased the opportunity for individuals to invest in individual retirement accounts by adding a new category of nondeductible Individual Retirement Account (IRA) – the Roth IRA. As part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), Roth 401 (k) and Roth 403 (b) plans became available beginning in January, 2006. Then, the Pension Protection Act (PPA) of 2006 improved and made permanent most of the retirement provisions of the EGTRRA.
This paper discusses advantages of including Roth accounts as part of retirement portfolios. Several favorable features of Roth accounts are presented along with a brief discussion about how effective use of Roth accounts can increase retirement income by eliminating or reducing the “social security tax torpedo.” An example is provided that demonstrates how Roth accounts allow for greater amounts to receive favorable treatment. Then, contrary to the traditional advice that Roth accounts provide a numerical advantage over traditional accounts only if tax rates on withdrawals are anticipated to be higher than tax rates at time of deposits, an example is provided that demonstrates that Roth accounts may offer an advantage even when tax rates are lower when distributions are taken.