3 Reasons You Should Go With a Roth Account for Retirement Savings
Written by
Lydia Kibet
Edited by
Amber Barkley
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When building your nest egg, you have several places to put your savings, the most common being traditional 401(k) plans and IRAs. Most of these traditional retirement accounts let you defer taxes until retirement, meaning you’ll pay taxes on withdrawals. With a Roth IRA, though, you pay taxes upfront, allowing you to enjoy tax-free withdrawals, as long as you meet some requirements in retirement.
Here are three reasons a Roth account is the best choice for your retirement savings over a traditional account.
Tax-Free Growth on Your Gains
One of the most attractive features of a Roth IRA is that it lets you grow your gains tax-free. With a traditional account, you benefit from tax-deductible contributions, but any withdrawal in retirement is taxable, including both your contributions and gains. This means that as your investments increase in value, so does the amount you’ll owe Uncle Sam.
In short, a Roth account protects your gains from future tax burdens.
Low Tax Rates
You’ve probably heard that high-income earners should pay taxes later, while low-income earners should pay now. This traditional thinking may not go your way if tax rates increase in the coming decades.
While predicting future tax rates is impossible, it’s important to note that they’re historically low right now. Paying taxes on your retirement contributions now, when tax rates are low, could be more beneficial than waiting until later.
For high earners or those expecting higher income in the future, you may be better off paying taxes now. By doing so, you lock in today’s low tax rates and avoid the risk of paying higher taxes on retirement income later on.
Greater Flexibility and Access to Your Money
Unlike traditional IRAs, which have strict rules on withdrawals before retirement, you can withdraw money from a Roth account more easily: Your contributions can be withdrawn at any time without penalties and taxes.
Be aware, though, that the earnings you make on top of those contributions can only be withdrawn without penalty after you have had the account for at least five years and you are at least 59½ years old.
The ability to access some of value of the account penalty-free makes it easier to cover unexpected expenses if an emergency arises or you decide to make a significant life change.
What To Consider Before Choosing a Roth IRA
Roth accounts offer several benefits, but they’re not a one-size-fits-all. For example, some high-income earners may find traditional IRAs advantageous if they get a tax break on their contributions now rather than later.
However, it’s difficult to predict future tax rates. That’s why having a mix of both Roth and traditional accounts may make sense. Tax diversification gives you the flexibility to manage withdrawals and adapt to changes in tax rates.
Retirement planning involves many unknowns, so getting professional guidance can be valuable. A financial advisor can help you estimate future tax rates and calculate the impact of contributing to different retirement accounts.
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