Roth IRAs are one of the most tax-efficient retirement savings vehicles out there, yet only 17% of households have a Roth account. (1) When it comes to saving for the future, many people rely on 401(k)s or traditional IRAs. While it’s wise to take advantage of matching contributions from employers in your 401(k) and contribute to a traditional IRA to lower your taxable income, here’s why you should consider using a Roth IRA to fund your retirement:
1. Tax Benefits
It can be tempting to think short-term and only invest in a traditional IRA for a tax deduction, but the Roth’s tax-free retirement income can be an even greater benefit to you. There’s no way to predict what tax rates will be when you retire, but by paying taxes up front, you could protect your savings from future tax hikes.
According to a recent study by NerdWallet, Roth IRAs beat traditional IRAs in that they net more after-tax retirement dollars when the annual maximum contribution is made. (2) Take a look at the difference between the final take-home savings amounts in the chart below. Despite paying more in taxes upfront, the individual in this scenario pays $26,152 less in taxes over their lifetime.
2. No Required Minimum Distributions
With most tax-deferred retirement accounts, the owner must begin taking required minimum distributions (RMDs) when they reach age 70½, regardless of whether they need the money to live. Why does this matter? Essentially, not taking RMDs means you can leave the money in your Roth to grow forever, even making more contributions after you retire if you earn an income. You can then use this nest egg as an estate planning tool to provide tax-free income for grandchildren and future generations.
3. Estate Planning
A Roth is an incredible way to leave a financial legacy for your loved ones. As you contribute, you are pre-paying taxes so that your children and grandchildren can inherit your hard-earned money without penalty. One caveat is that while you aren’t required to take RMDs with your Roth, if you use it as an inheritance your heirs will be required to make withdrawals based on their life expectancy.
While the primary goal of a Roth is to save for retirement, the way it is set up allows for plenty of flexibility if you need to tap into it for any reason. Keep in mind that if you want to avoid tax penalties, you can only withdraw your contributions, not your growth. In fact, many people use a Roth as a college savings fund. If your children do not go to college, the money is still readily available for you to use in retirement, which is not the case with 529 college savings plans. This flexibility allows you to save for retirement without worrying about your money being tied up if you need it for an emergency.
How To Get Started With A Roth IRA
There are two things to consider when deciding if a Roth IRA is the best retirement savings option for you. First, Roths have specific income limitations. In 2017, singles making over $133,000 cannot contribute to a Roth and the amount they can contribute begins phasing out after $118,000 of earnings. The phase-out period for married tax filers is $186,000-$196,000. (3) However, anyone can convert a traditional IRA into a Roth through a “backdoor conversion,” by first contributing to a traditional IRA and then paying any taxes due when you convert to a Roth.
Second, you are allowed to contribute up to $5,500 a year, $6,500 if you are over 50. Take advantage of the annual contribution limits so that your Roth can reach its full potential and provide for you in retirement.
Roth IRAs can be an incredible asset to add to your portfolio. When making important financial decisions like this, it always helps to talk to an experienced professional who can help you understand your options and the implications of different choices. If you are considering investing in a Roth IRA, please contact me today at (717) 283-4186 or by email at firstname.lastname@example.org. I look forward to helping you grow your retirement savings.
David Niggel, CFP®, ChFC®, AIF® is the founder and president of Key Wealth Partners, LLC, an independent wealth management firm serving individuals, families, and business owners. Along with over a decade of financial services experience, he has advanced knowledge and training in providing holistic financial planning with fiduciary and ethical care, holding the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Accredited Investment Fiduciary® certifications. With hands-on entrepreneurial experience, he has the unique ability to help clients meet both their individual and business goals. Based in Lancaster, he serves clients through the York, Harrisburg, Hershey, and Central, Pennsylvania areas. Learn more by visiting www.keywealthpartners.com or connecting with David on LinkedIn.