You Can't Deduct Roth IRA Contributions. Here's Why It's Worth Making Them Anyway

If you put money into a 401(k) or you open a traditional IRA with a brokerage firm and put money into it, you will not be taxed on the amount you invested in these accounts (as long as you don't exceed the allowable annual contribution limits).

Being able to make contributions with money you aren't taxed on provides you a huge financial benefit. If you invest $1,000 and you're in the 22% tax bracket, you save $220 on your tax bill since you aren't taxed on that $1,000. You will end up bringing home just $780 less money than you would have if you hadn't made the contribution. But you'll have the full $1,000 in your brokerage account working for you.

There's another type of retirement account that does not offer you the ability to deduct your contributions, though. It's called a Roth IRA. Since it doesn't come with an immediate tax benefit, you may be wondering if it's worth contributing to it. The answer for most people is yes, for three big reasons.

You get to defer your tax break until retirement

While you don't get to claim a tax deduction for Roth IRA contributions, that does not mean a Roth IRA doesn't come with tax advantages. It does. They just come later.

See, you get to take money out of your Roth IRA as a retiree and not pay a dime in taxes on it at the time. If you suspect your tax rate may be higher later in life (which is entirely reasonable to think, given that tax rates have hovered at historic lows for years even as the national debt is climbing) then you may want your tax savings later on.

Your Roth IRA could help you avoid being taxed on Social Security benefits

Social Security benefits are taxed only once your countable income exceeds $25,000 as a single filer or $32,000 as a married joint filer.

Your Roth distributions don't count when determining if Social Security benefits are taxable. Countable income is half your benefits, all taxable income, and some non-taxable income -- but not withdrawals from a Roth. Since all your investment income won't count against you in this calculation, it's a lot less likely you will be taxed on your retirement benefits.

This means you get even more tax savings. And this benefit will matter to a growing number of people, as the thresholds at which Social Security benefits are taxed is not indexed to inflation. Those $25,000 and $32,000 limits don't change automatically, even as wages and costs grow. Therefore, more retirees each year are taxed on benefits. If you have a Roth IRA, you likely won't have to worry about that.

You have more flexibility for withdrawals with a Roth IRA

Finally, if you have a Roth IRA, any contributions you make to it can be withdrawn without penalty at any time -- even if you aren't retired yet. This isn't the case with traditional IRAs or 401(k) accounts. If you take money out of those before age 59 1/2, you would generally be hit with a 10% tax penalty.

While it isn't a good idea to make early withdrawals from a retirement account, sometimes it is necessary in a true financial emergency. With a Roth IRA, you have that option without taking a tax hit. Say you need to make a big repair to your home, like adding a new roof -- withdrawing from your Roth IRA could mean avoiding taking on debt in the form of a personal loan or credit card charge.

For all of these reasons, you may want to seriously think about putting at least some of your money into a Roth IRA after maxing out any employer match your company provides for 401(k) contributions.