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Why a Roth IRA Could Be the Best Retirement Savings Tool for You

By Maurie Backman – Dec 10, 2021 at 6:46AM

Key Points

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Here's why you may want to favor a Roth over all other retirement plans.

Once you retire, you'll likely need more than Social Security to cover your living expenses. Those benefits will replace about 40% of your paycheck if you're an average earner, and most seniors need roughly double that amount to keep up with their bills and have enough money left over to enjoy themselves.

That's why it's a good idea to save consistently for retirement, and there are a host of options for housing your money while enjoying some nice tax breaks along the way. But if you're going to save for retirement in a tax-advantaged savings plan, it really pays to consider a Roth IRA. Here's why.

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1. Less stress from a tax perspective

Roth IRA contributions won't earn you an immediate tax break the same way traditional retirement plan contributions will. But once you enter retirement, the withdrawals you take from your savings won't be taxed at all. And that could make it much easier to manage your money during your senior years.

2. Less of an impact on Social Security benefit taxes

Many seniors are shocked to learn that Social Security benefits can be taxable in retirement. That said, they're not always taxable. Whether you pay taxes on them or not hinges on what your provisional income looks like.

Your provisional income takes your total non-Social Security income and adds in 50% of your annual benefit. Once that total hits $25,000 for single tax filers and $32,000 for married couples filing jointly, taxes on benefits can start to apply.

The great thing about Roth IRA withdrawals is that they don't count toward provisional income. So not only might you get to enjoy your retirement plan withdrawals tax-free, but you might also get to keep your Social Security benefits in full.

3. More flexibility with your money

Most tax-advantaged retirement plans, including Roth 401(k), force savers to take required minimum distributions (RMDs) during retirement. RMDs are calculated based on your savings balance and life expectancy, and failing to take them can result in steep penalties.

Roth IRAs, however, are the only tax-advantaged retirement plan to not impose RMDs. This can benefit you in a couple of ways.

First, if you don't need your savings right away in retirement, you can leave your Roth IRA alone and let it continue to grow in a tax-advantaged fashion. Furthermore, if your goal is to leave a substantial chunk of money behind to your heirs, a Roth IRA could make that possible.

A smart bet for your retirement

Some people prefer to save in a traditional IRA or 401(k) so they can score an immediate tax break on their contributions. But it definitely pays to consider a Roth IRA for the above reasons.

If you're a high earner, you may be barred from funding a Roth IRA directly. But if your income exceeds the limits for making contributions, you can always put money into a traditional IRA and convert it to a Roth after the fact. You'll pay taxes on that conversion, but you'll then enjoy the benefits of a Roth IRA throughout your retirement.

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