Social Security is a nice stream of income to have in retirement, but it's not going to fund your lifestyle on its own. If you wait until you're 66 or 67 to claim your benefits, you might earn 40% of what you made while you were working, which clearly isn't enough to cover your expenses in retirement.

That puts the pressure on you to establish a supplementary source of retirement income. Investing in a Roth IRA is one strategy that should make your short list. Here are three reasons why.

1. You can invest your Roth funds to generate cash

Relative to a 401(k), the Roth IRA normally gives you access to a broader universe of securities. Notably, you can invest your Roth IRA contributions directly in dividend-paying stock. If you're willing to manage a diversified portfolio, direct stock investments can produce higher returns than dividend-paying mutual funds. This is because stocks don't charge fees the way mutual funds do.

A dividend strategy works nicely for retirees, too, because the income can directly fund your cash distributions. That reduces or eliminates ongoing liquidations in your account and protects your future earnings potential. 

Senior man putting money in a piggy bank to represent Roth IRA deposits.

Image source: Getty Images.

2. You don't have to withdraw your Roth funds

Starting in your 70s, the IRS requires you to take minimum distributions from 401(k)s and traditional IRAs. You pay taxes on those distributions, and you lose the benefit of tax-deferred earnings on those funds. But there is no minimum distribution requirement that applies to the Roth IRA. That allows you to use your Roth IRA in two ways. One, it can provide the extra retirement income you need to pay the bills. And two, it can also be a savings account that you can spend later or leave to your family.

To demonstrate, let's say you save up $1 million in your Roth account by the time you're ready to retire. You've built a portfolio of high-quality dividend payers, and the account is generating $30,000 a year in cash. If you can live on that $30,000 plus your Social Security, you can leave your $1 million in principle untouched in the account. It'll continue to grow in value without tax consequences for as long as you want. You might grab a piece of it to celebrate your 75th birthday with a cruise around the world. Or, you could earmark the money for your loved ones to enjoy after you're gone. You just don't have that flexibility with a 401(k) or traditional IRA.

3. Roth IRA distributions don't affect taxation of Social Security

Qualified distributions from your Roth IRA after the age of 59 1/2 are not taxable. That's a nice perk on its own, but it also helps with the taxation of your Social Security income.

Social Security income is taxable at varying levels, depending on your combined income. Combined income is defined as half of your Social Security benefit plus all of your other taxable income such as pensions, wages, and investment earnings. When your combined income is more than $25,000 for single filers or $32,000 for married filers, you'll owe taxes on half of your Social Security income. If you make more than $34,000 as a single filer or $44,000 as a married filer, you pay taxes on 85% of your Social Security benefit.

But here's the kicker. Since Roth IRA contributions aren't taxable, they're not factored into the combined income formula. That gives the Roth account a distinct advantage over other types of retirement accounts, including the 401(k) and the traditional IRA. If the Roth is your only income source outside of Social Security, your combined income would simply be half of your Social Security benefit. And that likely means you won't pay federal taxes on Social Security at all.

Start saving to your Roth IRA today

There is one big limitation of the Roth IRA that you'll have to manage. The cap on annual contributions is fairly low; in 2021, it's $6,000 or $7,000 if you're 50 or older. To put that in perspective, saving $6,000 a year for 10 years at a 7% annual growth rate grows to roughly $90,000 in 10 years. That's not a lot to retire on. The numbers look far better when you have 20 or 30 years on your side, which is enough time to hit a balance of $600,000 or more.

The Roth IRA is a powerful, flexible account that could generate the extra retirement income you need to supplement Social Security. But there's work required on your part, too. You have to start contributing and investing -- today -- to have a shot at covering that income gap.