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4 Reasons Roth IRAs Rule

By Maurie Backman - May 1, 2021 at 7:18AM

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Here's why it pays to house your retirement savings in this awesome account.

When it comes to saving for retirement, there are different plans you can choose from. You may be tempted to open a traditional IRA because that way, you'll get an up-front tax break on the money you put in.

Roth IRAs, on the other hand, don't offer that instant gratification. Rather, with a Roth IRA, you may have to wait years to reap some solid benefits. But in spite of that, here are a few reasons why Roth IRAs may be the best retirement savings plan out there.

1. Your withdrawals are yours to enjoy tax-free

If you think paying taxes is difficult now, imagine having to deal with the IRS when you're a senior, at a time when your income may be far more limited and a surprise tax bill could really throw your finances off course. The beauty of Roth IRAs is that they're funded with after-tax dollars, so once you have money in your account, taxes won't come into the picture. You'll get to enjoy your withdrawals during retirement without the IRS getting a piece of that money.

Envelope labeled Roth IRA with hundred-dollar bills sticking out of it

Image source: Getty Images.

2. Your distributions won't cause you to get taxed on Social Security benefits

If Social Security is your only income source during retirement, you'll generally avoid taxes on those benefits. But if your income is high enough, you could lose a chunk of your benefits to taxes.

The great thing about Roth IRAs is that your withdrawals won't count as income for the purpose of calculating whether you're liable for taxed Social Security benefits (though you may still be subject to those taxes if you have other non-exempt income sources that boost your earnings during retirement or if you don't live in one of the 37 states that don't tax Social Security).

3. You won't be forced to take required minimum distributions

Once you turn 72, you'll be forced to start taking withdrawals from your retirement plan whether you want to or not, and any money you don't remove will be subject to a 50% tax penalty. Those withdrawals are called required minimum distributions, or RMDs, and they can be problematic for a few reasons.

First, if you have a traditional IRA or 401(k), they immediately create a tax liability for you. RMDs from a traditional retirement plan also count as income for Social Security tax purposes. And while RMDs taken from a Roth 401(k) don't create a tax liability, if your goal is to leave a large chunk of your retirement savings to your heirs, RMDs are a roadblock.

The wonderful thing about Roth IRAs is that they're the only tax-advantaged retirement plan to not impose RMDs. If you want to leave money behind to loved ones, a Roth IRA is generally your best bet.

4. You get tons of flexibility

We learned earlier that Roth IRAs are funded with after-tax dollars. That's something that's generally considered a negative -- missing that up-front tax break. But on the flip side, you also won't be penalized if you remove money from your Roth IRA early because you don't get a tax break on your contributions.

Generally, retirement plan withdrawals taken before age 59 1/2 are subject to a 10% penalty. But since you don't get a tax break on your Roth IRA contributions, you can remove the contributions you made from your account at any time without taking that hit.

Removing funds from a retirement plan prematurely is generally a bad idea, since that money is supposed to be reserved for your senior years. But if you run into a jam, your Roth IRA could be your backup plan, helping you to avoid serious debt.

Another thing you should know is that you can only remove your principal Roth IRA contributions early without penalty. In other words, if you contribute $20,000 to your Roth IRA and it grows into $30,000, you can only avoid penalties on the initial $20,000 you put in yourself.

Clearly, Roth IRAs are a solid choice when it comes to finding a home for your retirement savings. It pays to open one today, and if your earnings are too high to qualify, just fund a traditional IRA and convert it to a Roth afterward. You'll pay taxes on the amount you move over, but you'll then enjoy the above perks that make Roth IRAs so appealing.

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