Roth IRAs are often hailed as a wonderful long-term savings option. But there are a few reasons why some people may choose to keep their retirement investments in other types of accounts.
If you want some upfront tax relief on your pension plan contributions, you’ll want to place them in a traditional system. IRA or a 401(k). And if you’re making a lot of money, you might not be able to directly fund a Roth IRA. (Although there is a way around the income limits – a Roth IRA conversion – some people might find it complicated.)
But while Roth IRAs may not be perfect, it’s easy to argue that they’re actually the best place for as much of your retirement savings as you can put into them. Here’s why.
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1. You won’t have to pay tax on your withdrawals
The beauty of a Roth IRA is that the withdrawals you make in retirement will not be subject to tax. And given that you will be using these funds at a time in your life when your budget may be tight, not having to pay some of your income to the IRS could be a great thing.
Also, we cannot know whether the government will increase tax rates over time, or how these increases might affect us. But if you’re using a Roth IRA, that’s not something you’ll have to worry about — at least not for that part of your retirement savings.
2. Your withdrawals won’t affect whether or not you pay taxes on your Social Security earnings
Social Security Benefits may be subject to federal tax to some degree, depending on your overall retirement income situation. But not all types of income are added to the equation that determines whether you’ll have to pay tax on some or all of your benefits.
Traditional IRA withdrawals are factored into this calculation, but Roth IRA withdrawals are not. As such, housing some of your long-term savings in a Roth IRA could mean you’ll be able to keep more of your Social Security earnings.
3. You don’t have to withdraw your plan balance while you’re alive
Roth IRAs are the only tax-efficient retirement plan not to be taxed minimum required distributions (RMD) on savers. The size of these mandatory annual withdrawals is based on your age, plan balance and life expectancy, and the penalty for not taking them is steep – 50% of any funds you were required to withdraw, but don’t. you didn’t.
Of course, one problem with RMDs is that they effectively force you to spend your savings over your lifetime — not to mention add to your tax liability if the money in question was in a 401(k) or traditional IRA. . But if you’re inclined to attempt to leave a large portion of your nest egg to your heirs, a Roth IRA should help you do so in a tax-efficient way.
It pays to consider a Roth
You may not like the idea of giving up the immediate tax breaks you get on contributions to other types of pension plans. And you may be confused about how to initiate a Roth IRA conversion. (Note: this is really not so difficult). But even so, it pays to consider keeping some of your retirement nest egg in a Roth IRA for the various benefits it offers.
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