Saving for retirement is just plain something all of us need to do. Without savings, you might really struggle to manage your living costs on your Social Security benefits alone.
When it comes to choosing a retirement savings plan, you have options. You could choose to participate in your employer's 401(k) plan or open a traditional IRA for the immediate tax savings involved.
But you may want to house your long-term savings in a Roth IRA. If you do, you'll get tax-free withdrawals during retirement, which means you won't have to worry about the IRS taking a portion 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're a really low earner (e.g., if your benefits are your only source of income), then you might manage to avoid those taxes. But if you're a moderate earner, taxes on some or most of your benefits could apply.
The upside of saving in a Roth IRA is that the formula used to determine whether you'll owe taxes on your Social Security benefits won't take your withdrawals into account when calculating your income. So if, for example, you have a traditional IRA or 401(k) and remove $15,000 a year, that sum will potentially cause you to have to pay taxes on your Social Security income. 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 won't let you leave your money to sit and grow indefinitely. Rather, you'll be on the hook for required minimum distributions, or RMDs, the amount of which will hinge on your savings balance and life expectancy each year.
Roth IRAs, however, are the only tax-advantaged retirement plan to not impose RMDs. That means you get more flexibility with your money. You can leave your savings alone so your investments can grow into a larger sum, and you can opt to leave some of your savings to your heirs if that's a road you wish to take.
It pays to consider a Roth IRA
While a Roth IRA won't give you an immediate tax break, you'll enjoy a host of benefits once you reach retirement. And so it pays to consider putting your savings into a Roth IRA.
One thing you should know is that if you're a higher earner, you won't be allowed to fund a Roth IRA directly. And in this case, "higher earner" means earning more than $214,000 as a married couple filing a joint tax return or more than $144,000 as a single tax filer. But even then, you can always open a traditional IRA and convert it to a Roth, so don't assume that option is off the table if you make a lot of money.
