Saving for retirement is simply something we all need to do. Without savings, you could really struggle to manage your living expenses on your Social Security benefits alone.
When it comes to choosing a retirement savings plan, you have several options. You can choose to participate in your employer’s 401(k) plan or open a traditional IRA for the immediate tax savings involved.
But you might want to house your long-term savings in a Roth IRA. If you do, you’ll enjoy tax-free withdrawals during retirement, which means you won’t have to worry about the IRS taking part of your income at a time when money may be tight.
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But Roth IRAs offer benefits beyond tax-free withdrawals. Here are two important ones you should know about.
1. A Roth IRA can help you avoid taxes on Social Security benefits
Many seniors are shocked to learn that Social Security income is taxable in retirement. If you make very little money (for example, if your benefits are your only source of income), then you could avoid these taxes. But if you have a moderate income, taxes on some or most of your benefits may apply.
The advantage of saving in a Roth IRA is that the formula used to determine whether you will have to pay taxes on your Social Security benefits will not take your withdrawals into account when calculating your income. So if, for example, you have a traditional IRA or 401(k) and you withdraw $15,000 per year, that amount will potentially require you to pay taxes on your Social Security earnings. But if you take that $15,000 from a Roth IRA, it won’t count against you for that purpose.
2. A Roth IRA can help you avoid RMDs
Most tax-advantaged retirement accounts don’t allow you to let your money rest and grow indefinitely. Instead, you will be liable for required minimum distributions, or RMDs, the amount of which will depend on your savings balance and life expectancy each year.
Roth IRAs, however, are the only tax-advantaged retirement plan that does not tax RMDs. This means you get more flexibility with your money. You can leave your savings alone so that your investments can grow into a larger sum, and you can choose to leave some of your savings to your heirs if that’s a route you want to take.
It pays to consider a Roth IRA
While a Roth IRA won’t give you immediate tax relief, you’ll enjoy a host of benefits once you retire. And so it pays to consider putting your savings in a Roth IRA.
One thing you need to know is that if you have a higher income, you won’t be allowed to directly fund a Roth IRA. And in this case, “top salary” means earning more than $214,000 as a married couple filing a joint tax return or more than $144,000 as a single filer. But even then, you can still open a traditional IRA and convert it to Roth, so don’t assume this option is out of place if you’re making a lot of money.
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