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The Perfect Way to Save for Retirement

Everyone wants to find ways to save more for retirement, and minimizing your tax bill is the best way to make sure you hang on to as much of your hard-earned retirement nest egg as possible. One of the best ways to accomplish that goal is to open a Roth IRA.

In the following video, longtime Fool contributor and retirement expert Dan Caplinger discusses the benefits of using a Roth IRA. As Dan notes, not only do Roth IRAs allow you to enjoy tax-free growth throughout your lifetime, you can even use the Roth as an estate-planning tool to pass on tax-free treatment to your heirs as well. The key to making the most of a Roth IRA, though, is putting the most appropriate investments into it, and Dan goes through the thought process behind how to choose which investments to make with limited Roth IRA assets.

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Read/Post Comments (16) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2013, at 8:30 PM, GeekZero wrote:

    The only way a ROTH makes sense is if you'll be in a higher tax bracket at *retirement* than when you add money into the account. For the vast majority of investors, the converse is true.

  • Report this Comment On May 01, 2013, at 8:44 PM, TMFGalagan wrote:

    @GeekZero - It's tempting to think so, but those who do a good job saving for retirement are often surprised at just how high their tax rates are after they retire. Moreover, Roths give you an opportunity for some estate-planning benefits that traditional IRAs lack.


    dan (TMF Galagan)

  • Report this Comment On May 01, 2013, at 10:11 PM, Molesto46 wrote:

    Come on. Get a Life. The guys at the IRS and the Fed r crooks.

  • Report this Comment On May 03, 2013, at 10:58 AM, sakarski wrote:

    I think that taxes have to go up in the future, especially for the huge number of retirees. The federal government won't be spending less but their will be fewer workers to tax, so logically the way to increase revenues is from the retirees.

    The best part of having a Roth IRA is that it gives you options. My retirement is mostly tax-deferred money, but the Roth IRA funds allow me the flexibility to take some taxable and some non-taxable withdrawals which can minimize the tax burden.

    It's always smart to give yourself options.

  • Report this Comment On May 08, 2013, at 1:35 AM, GeekZero wrote:

    Unfortunately, there's no guarantee the government won't change the rules and tax Roth withdrawals at some point in the future. Maybe it's better to take the advantage now -- while you can?

    <i>Roths give you an opportunity for some estate-planning benefits</i>

    Thanks, didn't know that. Hopefully those won't disappear either....

  • Report this Comment On February 12, 2014, at 3:13 PM, JDLove wrote:

    The options are very positive! You can take withdrawals tax free. The biggie to me is that a regular IRA passed to my kids is taxed over 5 years to them. Eats up a lot of the estate passed on plus places them in a higher bracket. With a Roth, my kids get it tax free without any burden.

  • Report this Comment On July 02, 2014, at 1:04 PM, pberardi wrote:

    If you are in the 25% tax bracket (30% if you add in most states) The traditional 401k contribution is better. Here is why.

    For every dollar you take away from a traditional contribution, it costs you 30% in taxes. Your take home pay shrinks. However, traditional 401k distributions when retired are taxed at ordinary income tax rates. Most financial calculators are completely wrong when they take 401k pre-tax distributions and take 25% (federal) off the top. This is completely wrong. Your distributions must run through the 10%. 15% and then 25% brackets therefore your "effective" tax rate is always going to be lower when retired regardless of your bracket.

    Effective tax rate in retirement will likely be lower than the marginal tax rate you are paying today.

    Keep in mind, you also get a standard tax deduction along with personal exemptions plus additional exemption for being 65 or older. The tax rates and deductions are indexed to inflation and will go up in order to prevent bracket creep.

    If you are young and in a lower bracket than 25%. the roth contribution is better. Not because it's tax free because you're still giving up 10-15% marginal tax savings by doing so. It;s because over the course of 30-40 years, the compounding of that savings will likely put you in the 25% bracket when retired. Therefore the 15% marginal tax rate savings today will cost you a potentially higher effective rate when retired.

    If you're in the 25% bracket now, max out the pretax 401k and then calc the immediate tax savings from your contribution, take those tax savings and do a roth IRA! That will really give your retirement savings a boost.

    Of course it just boils down to you saving more!

  • Report this Comment On July 07, 2014, at 7:54 PM, AZLZRD1 wrote:

    Can you own both a 401k and a Roth IRA? Does this change with age (i.e. over 60)?

  • Report this Comment On September 20, 2014, at 4:34 PM, SaintJoseph wrote:

    Hi Fools,

    Retirement is actually a life long process.

    I studied very hard and smart since grade school.

    That gave me the opportunity to

    graduate with a Professional degree from

    the top Canadian University,

    University of Toronto ranked

    20th top University in the world by United Nations.

    I work4d hard and smart,

    always improve my skill with appropriate courses.

    But, most important of all are:


    2. INVEST my savings for the long term

    (next generation) in the buy-and-hold fashion,

    in large cap, blue chip North American stocks,

    with wide moat, and

    recurring business advantages.

    Now that it is 14-1/2 years after my early

    retirement, and barring any major market crash

    in any 2 consecutive years,

    I will remain financially secured until beyond 100.

    Those are the 2 o so

    most important things, for me,

    to secure a life time of security.

    Very simple!

    Very doable!

    I do believe "Where there's a will, there's a way!"

    It's your move!!!


  • Report this Comment On September 20, 2014, at 4:41 PM, SaintJoseph wrote:

    Hi Fools,

    Post script!

    I should have signed off as

    "Simply another Fool".

    Just 1 thing to add.

    I fired my stock broker

    3 decades ago.

    Things have been just fine

    with my rather simple methodology.

    It has worked for me

    over 4 decades.

    Show me any "financial/investment

    advisor/planner", and

    I'll show you another person making a living with

    other people's money.

    Besides, the good one have already

    retired rich with other people's money.

    That's the Fool's take from personal experience.

    Your serving FOOL.

  • Report this Comment On September 20, 2014, at 4:46 PM, SaintJoseph wrote:

    Hi Folks,

    Memory serves me right,

    I believe the income tax was first instituted

    to finance fighting the 1st World War.

    Now that we still have to pay income tax,

    would some one tell me when would

    the 1st World War end!!!???

    A bigger Fool than ***!

  • Report this Comment On September 20, 2014, at 5:08 PM, doctordonna wrote:

    I believe recent Supreme Court Rulings impact Roth IRA's characteristics. Specifically, I believe they are not considered protected from creditors as a traditional IRA is.

  • Report this Comment On September 20, 2014, at 5:50 PM, tes1900 wrote:

    I would very much like to be part of FO but I am afraid I cannot see my way clear to afford it. I am retired and counting every penny. The cost of it would almost take half of my income

    Thank you though.

  • Report this Comment On October 24, 2014, at 11:39 AM, nick2302 wrote:

    The other fact that so many of those touting ROTH's leave out is that there is an income cap. So if you make too much you cannot contribute to a ROTH no matter how old you are. As always Uncle Sam is going to make sure the American middle class does not catch a break.

  • Report this Comment On January 01, 2015, at 3:04 PM, arbhimani wrote:

    Over the years as I changed jobs, I rolled over my IRAs (previously 401k from previous employers) to a centralized financial institution. Since 2009 I have been rolling over those IRA funds in chuncks to Roth every year. In the last 5 years I have built up 3 buckets of funds. 1) Roth since 2009 2) IRA from previous jobs 3) 401k with current employer.

    The biggest asset we all have is TIME. So the question is why not take advantage of power of accumulation of money without having to pay taxes when we retire. Which one would you rather do if you were converting IRA to Roth: convert in January or convert in December while in the same calendar year. Converting in January, the dividends and short and long gains have not come thru. If you convert 10k IRA to Roth in January vs 11k in December of same fund (assuming growth of 1k by December), you will be paying more taxes if converting in Dec. So convert in January and enjoy the 1k gain as Roth. The forumula that has worked for me is convert a chunk of IRA fund valued between 15 to 25 % of your current salary. This will allow you to NOT have to pay out of packet taxes when you are doing tax returns every year.

    If you are already a disciplined saver taking advantage of maximum allowed 401k (18k in 2015 and additional 6k if over 50), you are already reducing your tax burden. Let the IRA to Roth conversion cause burden of tax every year little bit at a time and long term you have built a big Roth tax free account by the time you are ready to retire.

    Last 5 years, the balance is shifting. It started 10% Roth 70% IRA and 20% 401k. This year the mix I see is 33% Roth (increasing) 40% IRA (going down) and 27% is 401k . Every year in January, I roll over IRA (between 10k to 15k) into Roth while staying within my 25% tax bracket without having to write a check to IRS end of the year.

  • Report this Comment On February 15, 2015, at 9:04 AM, katylin198789 wrote:

    Here's the path to retire on your own terms, in 7 steps:

    1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from Insurance Panda. Forget about buying a house until your debts are paid off.

    2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    6) Make as much as you can. Save as much as you can. Give away as much as you can.

    7) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

    Don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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