Skeels Cygan: The tax-free benefits of Roth IRAs

Question: Why would anyone choose to pay taxes sooner rather than later?

Answer: Because Roth IRAs provide tremendous benefits!

During 2026, I encourage you to fund a Roth IRA — whether you contribute to a Roth 401(k) or Roth 403(b) through your employer, open a Roth IRA at a brokerage firm (assuming your income meets the requirements), or convert a portion of your traditional IRA to a Roth IRA.

The Benefits of a Roth IRA

I consider Roth IRAs more valuable than traditional IRAs. Here are seven reasons:

1. They can save you money on taxes in the long term.
2. They grow tax-free rather than tax-deferred (like traditional IRAs).
3. They do not have required minimum distributions (RMDs).
4. Roth conversions are not “all or nothing.” You can gradually convert a traditional IRA to a Roth IRA.
5. They can be left to children or grandchildren tax-free when you die.
6. Roth IRAs can grow and compound tax-free over many years.
7. They allow you to diversify your investments (between taxable, tax-deferred and tax-free accounts).

Let’s focus on benefits 1, 4 and 5.

Saving money on taxes in the long term

When you fund a Roth IRA, or a Roth 401(k), you do not receive a tax deduction like you would with a traditional IRA. Yet the many years of growing tax-free — rather than tax-deferred — make the Roth IRA outshine the traditional IRA in the long run.

Roth conversions have become popular in recent years because of the impending tax “torpedo” that occurs when RMDs begin at age 73 or 75. If someone has invested diligently in a traditional IRA over their career, the account can often grow to several million dollars.

Let’s look at an example. Assume a 50-year-old investor has saved $1 million in her traditional 401(k). We’ll also assume she is funding a Roth 401(k) going forward, so there will not be any additional contributions in the traditional 401(k). Using the “Rule of 72,” we can assume the account will double in 10 years if she averages a 7.2% return each year. Therefore, her account will reach $2 million when she is 60 and $4 million when she is 70. By the time she must start RMDs at age 75, it will be roughly $6 million. If she is fortunate, and the account averages a higher average annual return than 7.2%, it will grow even larger.

Based on current tax laws, her RMD at age 75 will be approximately $240,000 (4%). It will increase each year as she ages. The RMD will trigger a higher IRMAA payment (Medicare premiums for high-income folks), as well as force her into a higher tax bracket. She likely has other income, such as capital gains and dividends from a taxable account, possibly a pension, and Social Security income. The high RMD will keep her in a high tax bracket for the remainder of her life. This situation has been labeled a tax bomb or a tax torpedo.

Converting to a Roth IRA requires that you pay taxes on the amount you convert in the year you convert. This is the downside, as you are basically pre-paying the taxes that would eventually be due on the traditional IRA.

Roth conversions are not ‘all or nothing’

The good news is that Roth conversions can be done gradually. In the above example, our investor may decide to convert $50,000 each year between the ages of 50 and 62. It is best to finish the conversions — if possible — by age 62 because IRMAA premiums are calculated beginning with income at age 63. She may decide to increase or decrease the amount she converts each year, based on her income fluctuations and tax issues. If she happens to have a low-income year, that is an excellent time for a Roth conversion.

It is best to pay the taxes due on the conversion each year from money in a taxable account rather than from a traditional IRA.

If you plan to leave your traditional IRA to charity rather than to a person, Roth conversions are not recommended because a charity will not pay taxes on the account when you die. However, if you leave your traditional IRA to children or grandchildren, they will pay taxes on the full amount. This takes us to benefit No. 5.

Roth IRAs can be left to children or grandchildren tax-free when you die

The Secure Act of 2019 changed the rules for inherited IRAs and eliminated the “stretch rules” that we enjoyed for many years. Inherited IRA accounts — unless inherited by a spouse — must now be liquidated within 10 years following the date-of-death. The full amount in a traditional IRA is taxable to the beneficiary as withdrawals are taken. If you were already taking RMDs when you died, then your nonspouse beneficiary must continue taking RMDs for the 10 years.

Inherited Roth IRAs must also be liquidated within 10 years, but the withdrawals are tax-free, and there are no RMDs required each year. Furthermore, if you leave an inherited IRA to a grandchild, their 10-year clock doesn’t start ticking until they turn 18, and then the account must be liquidated within 10 years by age 28. These extra years of tax-free compounding can be powerful!

Consider funding a Roth IRA in 2026. Be proactive, and start now!

Donna Skeels Cygan, CFP®, MBA, is the author of “The Joy of Financial Security.” She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at donna@donnaskeelscygan.com.