Roth IRAs and 401(k)s (called DRAC, or Designated Roth Account) are common wealth-accumulation tools. There are multiple ways to utilize a Roth, and they offer significant financial planning opportunities, notably the elimination of Required Minimum Distribution (RMD) friction (‘tax friction’) and the protracted compounding period of the joint lives of the Roth owners plus 10 years, thanks to the SECURE Act. Roths possess some primary characteristics:
· All qualified earnings are tax-free
· There are no Required Minimum Distributions (RMD) to the owners (if the Roth 401(k) is rolled into a Roth IRA)
· An inherited Roth (for inheritances after 2019) may be withdrawn up to 10 years after the death of the owner
There are two primary ways to fund a Roth, either by contributing (e.g., contributory Roth IRAs, back-door Roth or DRAC) or by converting an existing RIA (or in some cases, 401(k) to a Roth by paying the taxes on the conversion). These attributes can provide significant advantages, particularly if the tax rate at the time of conversion is lower than the prospective tax rate at the time of distribution.
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