By Vladimir Kouznetsov

Roth IRAs, along with their cousin, the Roth 401(k), are one of the best options for many to save for retirement. It is not a surprise that financial advisers often recommend them as these types of accounts can provide many great benefits including tax-deferred growth on your investment, allowing the full amount of profits to be reinvested year over year and compounded over time.

Roth-type accounts also provide tax-free qualified distributions in retirement which can insulate you, to some extent, from future tax rate changes. While nobody can tell you for sure if the taxes will increase in the future, having a source of tax-free money in retirement can help you mitigate the risk.

Roth IRAs have some additional benefits over a traditional IRA or 401(k): You can take your contributions (but not profits) out any time with no additional taxes or penalties, although most Roth 401(k) plan accounts have restrictions on withdrawals while you are still working at the company that sponsored the retirement plan. Also, you do not need to take Required Minimum Distributions (RMDs) from a Roth IRA once you reach age 70 ½. Roth 401(k) plan accounts require RMDs every year once you reach the RMD age and no longer work at the company.

However, Roth-type accounts may not always be your best option. The drawback of Roth retirement accounts is that contributions are not tax deductible. If you contribute your money into a traditional IRA or 401(k) plan, your contribution may be tax deductible in the current year and can help you reduce your current taxes. That, in turn, can allow you to save more for retirement.

Which type of account is better depends on your situation, and there is no one-size-fits-all solution. In some situations, you can benefit more from investing your retirement contributions into a traditional IRA or 401(k) account. Here are a few examples:

You Need a Tax Deduction Now

You may benefit from increasing your current tax deduction to help you preserve Qualified Business Income (QBI) or a Section 199A deduction. QBI is a new deduction for businesses with pass-through taxation, such as proprietorships, partnerships, S Corporations or LLCs taxed as partnerships or S-Corporations. The deduction may be limited for businesses that provide professional services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.

For these businesses, if the business owner's taxable income is above a certain limit, the deduction will not only be limited but will also reverse its course. Contribution to a tax-deferred type retirement account may reduce taxable income in the current year and help the business owner preserve the QBI deduction.

You Have Unusually High Income This Year

Did you sell a real estate this year or receive a payment on a multi-year contract? There may be situations when you receive an unusually high income in a single year, and that income may not repeat next year. Or you may be getting close to retirement and planning to slow down your business. If this higher current income pushed you into a higher tax bracket than you expect in the future, you may be better off contributing to a tax-deferred account and taking a deduction this year.

You'll Have Lower Taxable Income in Retirement

Most of us expect to have a much lower earned income amount in retirement, if any at all. But having lower earned income may not necessarily mean having lower taxable income. If you want to keep the same lifestyle in retirement and are planning to draw all your retirement income from taxable sources like pensions, tax-deferred retirement accounts, rental properties, and Social Security, your taxable income may not be lower.

However, if you are already planning to have part of your income from tax-free sources, like a Roth IRA, and only a portion from taxable sources, then your future tax rate may be lower. It may be more efficient for you to benefit from a tax deduction now.

You're Planning a Move That Affects Income Tax

Say you are currently living in a state with high taxes, like New York or California. If you are planning to move to a state with lower or no income taxes, you may consider making retirement contributions in a way that would give you more tax reduction benefit now.

For example, if you are currently living in California and are planning to retire in Florida. You may currently be paying 9% or an even higher tax rate at the state level. You will pay no state income tax in Florida. While we do not know what future federal tax rates are going to be, you need a huge federal tax increase to beat the 9% state tax reduction.

A Roth May Not Be Available

Your access to a Roth 401(k) depends on your company. Roth 401(k)s were designed to be an addition to the original 401(k) plans. They were first introduced in 2006 and are still relatively new in the retirement planning arena. Access to these plans is becoming more common lately, but there are still a lot of 401(k) plans out there that do not provide the Roth component as an option.

If a Roth 401(k) is not available for you, then the only other options may be a Roth IRA. The contribution limit for a Roth IRA is smaller than for a Roth 401(k). For the 2018 tax year, the Roth IRA contribution limit is $5,500 (you can make your contribution up to the tax filing deadline on April 15). For the 2019 tax year the limit is going up to $6,000. Those over age 50 can make an additional $1,000 catch-up contribution.

Roth IRA contributions also have an income limit. In 2018, for a single person, the ability to contribute to a Roth IRA becomes limited with income over $120,000. Contributions are completely phased out with income over $135,000. In 2019 these limits go up by $2,000 to the $122,000 - $137,000 range. For married filing jointly, the phase-out range is $189,000 - $199,000 in 2018. The range goes up by $4,000 in 2019 to the $193,000 - $203,000 amounts. The phase-out range for married filing separately is $0 - $10,000.

Best of Both Worlds

Look at Roth conversions. A good tax strategy could be to increase your pre-tax contributions to accounts like a traditional IRA, SEP-IRA or 401(k) in the years when your income is high. When you happen to run into a slow year, you can convert some of the pre-tax traditional IRA funds into a Roth IRA. When your income is lower in a slow year, your tax rate is also lower, and you can take advantage of the lower rate during that year. You may also plan to have a systematic partial conversion of your traditional IRA money early in retirement.

Work with a qualified financial adviser who specializes in retirement distribution planning to develop a long-term Roth contribution and conversion plan. A good plan can help you to maximize your lifetime after-tax distributions and have a significant impact on your retirement lifestyle.

About the author: Vladimir Kouznetsov, CFP, is a fee-only independent financial adviser and founder of Retegy, LLC. Vladimir specializes in retirement accumulation and distribution planning and advanced tax strategies. He is a member of Ed Slott's Master Elite IRA Advisor Group.