Could Biden raise your taxes? Arm yourself with a Roth IRA

A taxing situation

During the 2020 presidential campaign, Biden repeatedly spoke about raising taxes on people earning more than $400,000, by increasing that top marginal tax rate.

He also discussed pushing up the capital gains rate paid by taxpayers earning over $1 million a year, from 20% to 39.6%. Capital gains taxes are owed on profits from the sale of assets, like shares of stock or a piece of land.

Biden reportedly plans to formally propose the tax increases during an address to a joint session of Congress next week. He'll frame the tax hikes as a way to pay for new education and child care spending.

If you're concerned that the president's tax plans might affect you, one defensive measure you can take now is to start saving in a Roth IRA.

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How a Roth IRA works

With a traditional individual retirement account (IRA) or a 401(k), money goes in directly from your pay before taxes have been taken out. You don't pay taxes on your savings until you withdraw them during retirement.

At that point, both your initial investments and your gains are taxed just like other income.

Traditional IRAs and employer-sponsored retirement plans, like 401(k)s, can be a solid play if you’re confident you won't be paying a higher top tax rate later in life. But if it's likely you'll be better off in retirement, a Roth IRA could be a smarter way to save.

Named after the late Republican U.S. Sen. William Roth of Delaware, a Roth IRA puts the taxes on the front end. After-tax contributions go in, and withdrawals in retirement — including on the investment earnings — are usually tax-free.

With a Roth IRA you’ll never need to worry about your savings being taxed at a higher rate in the future, because the taxes have already been paid.

Why a Roth may be the play

So, if you were to open a Roth IRA before Congress passes any tax hike, you would escape having to pay the higher rate during your later years — no matter how well off you are by then.

One important detail about Roth IRAs is that there are income limits. In order to directly invest in a Roth, your adjusted gross income must be under $140,000 if you file taxes as an individual, or $208,000 if you're a married couple filing jointly. AGI is your total income minus some deductions.

If you earn more than the limit, you might still take advantage of a Roth using a loophole called the "backdoor Roth IRA." You save in a traditional IRA, which has no income limits, then do a conversion that involves rolling the money into a Roth.

It’s a pretty simple process. Savings in a traditional IRA can be converted into a Roth IRA if you pay tax on the amount you are converting. There are no income limits for doing a conversion, and the funds can then be withdrawn tax-free after you retire.

A certified financial planner professional can help you leverage the different types of retirement accounts to get the most from your savings. Today's financial planning services are affordable, and are even available online.

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Keep it — you earned it

No matter how you approach your retirement, you’ll want to do it right. There’s no point working your tail off for 40 years only to have your savings stall because you made a wrong move or two along the way.

If you do your own taxes, make sure you’re using trustworthy software that can make the process easier, more accurate and less time consuming.

To sweeten your retirement savings, you might want to get creative — maybe by investing in farmland. Yes, farmland. The rate of return over the last 47 years has been better than 10% — better than average returns on real estate or stocks.

Or, fatten your nest egg with very little effort by downloading an increasingly popular app that allows you to invest in a diversified portfolio using just "spare change".