Six Reasons to Save in a Roth IRA

I want to talk about Roth IRAs for a minute. And not just Roth IRAs, I want to talk about six reasons that you might want to consider using a Roth IRA for saving for your retirement. Reason number one, pre-paid retirement income. What do I mean by that? You’re pre-paying Uncle Sam. You’re pre-paying your tax when those contributions go in. So that way, later in life when you start taking money out of these accounts, that way it’s going to be tax-free income to you. Many benefits of that obviously. Doesn’t that sound wonderful to income that you’ve earned that you’re taking out and spending and you don’t have to pay tax on it? Some other potential perks that go along with that depending upon your income structure and the other incomes you have, it might make less of your Social Security tax while you’re drawing Social Security. Again, everybody is a little bit different and make sure that you talk to a tax professional exactly for your situation. But again, the way that things are taxed when you get to that point, you could have a positive impact for you when you get to that. Number two, tax-free withdrawals. Specifically what I’m talking about here is larger one time distributions. Think of later in life, need home repairs, new roof on the house, hot water heater goes out. Maybe you need to replace a vehicle. Maybe you have to help children or grandchildren at some point and you need a lump sum of money coming out to do that. Boy, taking it from a 401K or pre-tax IRA would generate a taxable event. A Roth IRA, you get to take that distribution and that tax is already paid. Remember, you paid it when you put that money in. So now it’s tax-free income to you. Reason number three, tax-free growth. Again, you’re paying off Uncle Sam right away. And that money hopefully is growing, interest is earning, compounding and all. You’re seeing that balance go up and up and up over time, tax-free. Again, you’ve bought out Uncle Sam from day one. So all of that money is yours versus a traditional or 401K type of account where yes, you’re growing your portion, but you’re also growing Uncle Sam’s as well. So a beautiful feeling when all of that money is yours and you’re growing it tax-free. Reason number four, more flexibility when it comes to distributions. If you don’t already know this, we’ve talked about it quite often here on the show. Once you reach the age of 73 or 75 depending upon your birthday, you’re going to have required minimum distributions on those 401K and IRAs and the like. So that way again, once you reach those ages, the IRS or government is going to tell you, you have to take these minimum withdrawals. Roth IRAs aren’t subject to that. So again, in theory you could never have to spend this money if you didn’t want to. You could let it grow and accumulate indefinitely. So again, more flexibility when it comes to that. Option or reason number five, setting up surviving spouse for success. So if you happen to be married and you’ve been putting money away in a Roth IRA, you’re giving that spouse an extra source of income or an extra bucket to pull money from that’s tax-free for them. So for a couple, if one spouse passes away, they go into a single tax payer bracket. Generally speaking for a similar amount of income, you’re going to pay a little higher percentage on that as a single tax filer. Again, if you’re trying to make up maybe for some lost Social Security because you know you lose the lower of your two Social Securities. Maybe you have a Pension that gets reduced or something along the way where that surviving spouse has to take a little more income. Wouldn’t it be great to be able to have that coming from a tax-free bucket. Again, just setting that surviving spouse up for success, whether that’s your loved one or even you if your spouse predeceases earlier. So again, just planning out for the future. And the final one, reason number six, tax-free legacy. Isn’t it great to be able to build wealth for yourself. Have that certainty in all these options we’ve talked about already, but then if you have money left over, it goes to your heirs and loved ones tax-free as well. What a great tool and great asset you’re leaving behind to be able to truly give that gift of the legacy and they don’t have any tax on it in their situation. Again, Roth IRAs and those, depending on who is inheriting it, if it’s children, friends, other family members outside of a spouse, there’s rules with inherited Roth IRAs. But again, generally speaking there’s not going to be tax owed on them. So as you’re considering your options to put away money for retirement, consider a Roth IRA and the lasting impacts it may have. Even if you’ve already started your IRA or maybe in those early years of retirement, you’re not potentially out of the woods yet and you can always consider Roth conversions as well. So hopefully you found this valuable with some of these interesting pieces of how a Roth IRA could be valuable for you and your family.