Saving for retirement is a key part of your overall financial planning, and making the best use of tax-favored retirement accounts can make a huge difference in how big your retirement nest egg is. But with all the choices among retirement accounts out there, it can be confusing to figure out whether a Roth IRA is better than other alternatives for retirement saving.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how Roth IRAs work and when they're the best choice for your retirement saving. Dan notes that Roth IRAs don't give you the same upfront deduction that regular IRAs offer, but they let you withdraw money in retirement tax-free. As a result, Dan points out that the big question to answer is whether your tax rate now is less than your tax rate will be in retirement. If getting an upfront deduction now wouldn't save you much in taxes compared to the rate you'll pay later, then a Roth IRA is often your best choice. If you're in a high tax bracket now, though, a Roth doesn't make as much sense. Dan concludes that you have to run the numbers and make estimates about future taxes in order to make a smart decision.