It's important to save for retirement, because if you don't, you might end up having to live a pretty bare-boned lifestyle. And after years of hard work, you deserve better.
But you have options when it comes to choosing a retirement account. Many savers like the idea of putting money into a traditional IRA for the up-front tax break on contributions.
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With a Roth IRA, you don't get to reap the benefits right away, since contributions are made on an after-tax basis. But here's why you really can't go wrong saving for retirement in a Roth IRA.
1. You could walk away with a huge tax-free gain
The money you sock away in a traditional IRA is tax-deferred from a gains perspective. This means you won't pay the IRS taxes on gains year after year, but rather at the time of your withdrawals.
Roth IRAs, on the other hand, offer the benefit of tax-free gains. That's huge.
Imagine you contribute $300 a month to a Roth IRA over 40 years for a total of $144,000. If your investments deliver an annual 8% return, which is a touch below the stock market's average, you could be sitting on almost $933,000 after four decades. That's a $789,000 gain you get to enjoy without having to pay the IRS a dime.
2. You won't have to stress about rising tax rates
The federal tax rates that are in place today aren't set in stone. They have the potential to change over time -- for better or for worse.
The nice thing about Roth IRAs is that withdrawals are tax-free. This means that in the context of your retirement savings, you don't have to stress out over tax code changes that affect you for the worse, like higher brackets.
Plus, a lot of people find themselves stressed about money in retirement, even when they have a nice amount of it. With a Roth IRA, you get to keep every penny you withdraw, which takes a lot of the pressure off.
3. You won't have the IRS telling you when to withdraw your money
Traditional IRAs eventually force you to start taking withdrawals in the form of required minimum distributions (RMDs). Not only do these create a tax liability, they limit the extent to which your money is able to grow in a tax-advantaged manner later in life.
Roth IRAs do not impose RMDs. That gives you complete control over your money.
Want to leave a portion of your retirement account to your heirs? You can do that. Want to let your Roth IRA sit untouched until you're 80, at which point you take out your gains and buy someone in your family a house? That's an option, too. And seeing as how it's your money, it's nice to be able to have complete control over what you do with it.
All told, there are plenty of reasons to love Roth IRAs. So despite the loss of the up-front tax break, you may want to consider using one to save for your senior years. Chances are, it's a move you'll be thankful for.
