There's a reason people are often willing to forgo the up-front tax break that comes with funding a traditional IRA and save for retirement in a Roth IRA instead. Roth IRAs offer the benefits of tax-free investment gains as well as tax-free withdrawals.
Plus, Roth IRAs do not force savers to take required minimum distributions (RMDs) during retirement. That's huge, because it allows your money to continue growing in a tax-advantaged manner for as long as you like. It also means that if you so choose, you can more easily use your retirement account as an estate-planning tool.
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But there's a less obvious reason to save for retirement in a Roth IRA. And it's one everyone needs to know about.
A Roth IRA could be your ticket to lower Medicare costs
Many people enroll in Medicare upon turning 65. But while Part A, which covers hospital care, generally does not charge enrollees a premium, Part B, which covers hospital care, comes with a monthly premium attached to it. There are also monthly premiums associated with Part D drug plans (though some enrollees are able to find $0 premium prescription plans).
The amount of money you pay for Part D hinges on the plan you choose. But Medicare Part B has a standard monthly premium that applies to enrollees universally.
That said, if you're a higher earner, you may be subject to surcharges on your Medicare Part B premiums known as income-related monthly adjustments amounts, or IRMAAs. And IRMAAs are based on your modified adjusted gross income (MAGI).
IRMAAs are also no joke. Depending on your income, they could add hundreds of dollars a month to the cost of your Part B premiums. And they could drive up your Part D costs as well.
Roth IRA withdrawals, however, do not count toward your MAGI. And for this reason, they won't drive you into IRMAA territory.
This year, for example, if you're single with a $250,000 MAGI, you be looking at a $446.30 IRMAA on your Part B premiums. But if 80% of that $250,000 comes in the form of retirement plan withdrawals, and you have your savings in a Roth IRA, that IRMAA won't apply to you.
Look at the big picture
It's easy to be tempted to save for retirement in a traditional account so you can save money on taxes immediately. But having your money in a Roth IRA during retirement could benefit you in more ways than one.
Aside from having tax-free income later in life and more flexibility when it comes to mandatory withdrawals, it could help you avoid a situation where your Medicare premiums become horrendously expensive.
