Saving for retirement during your working years could help ensure that your senior years are as comfortable as you want them to be. And when it comes to finding a home for your savings, you have choices.
You could open a traditional IRA and house your nest egg there. The benefit of going this route is that you can shield some of your earnings from taxes and minimize your near-term IRS burden.
Another option, though, is to keep your retirement savings in a Roth IRA. And here are three great reasons to make a Roth IRA your go-to retirement account.
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1. No taxes on withdrawals
When you fund a Roth IRA, you do so with after-tax dollars -- meaning the IRS has already taken its share of your money. Because of this, you get the benefit of not just tax-free growth on your savings but also tax-free withdrawals in retirement.
Many retirees worry about living off of savings in the absence of a work-related paycheck. So, not having to pay taxes on what could be a huge chunk of your retirement income could lift a huge weight.
2. No RMDs
When you save in a traditional IRA, you can't just let your money sit there enjoying tax-advantaged growth forever. The IRS will eventually force you to start withdrawing from that account in the form of required minimum distributions, or RMDs.
Roth IRAs, on the other hand, don't impose RMDs. And that could work to your benefit in a couple of ways.
Let's say that based on your year of birth, you're required to take your first RMD at age 73. If you don't need the money for five more years, with a Roth IRA, you could let it continue to grow tax-free until age 78. Plus, not having to take RMDs could make it easier to leave money behind to your heirs if that's something that's important to you.
3. Fewer worries about an early retirement
We said earlier that Roth IRAs are funded with after-tax dollars. What this means is that you can withdraw your principal Roth IRA contributions at any time without incurring a penalty. The same can't be said for traditional IRAs.
Let's say you fund a traditional IRA for many years and reach the point where you have enough savings to retire at age 54. At that point, you have a problem. Traditional IRAs require you to wait until age 59 1/2 to access your money or otherwise hit you with a 10% early withdrawal penalty.
With a Roth IRA, you can withdraw from your principal without a penalty whenever you want because there is no tax break on your contributions. So, in some ways, funding a Roth IRA could make it possible to pull off an early retirement.
You should also know that it may be possible to tap the gains portion of your Roth IRA penalty-free before age 59 1/2 as well. You must have your account open for at least five years for this to be possible.
All told, there's much to be gained by saving for retirement in a Roth IRA. And if your income is too high to contribute to one of these accounts, worry not. It's possible to fund a traditional IRA and convert it to a Roth after the fact, so the option is on the table either way.
