3 Big Reasons a Roth IRA May Be Right for You

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A Roth IRA can be a great investment account option. Here are three reasons why you may want to consider investing in one. 

When you invest for retirement, the first thing you need to do is to max out your 401(k) match if you have one.

If your company offers this workplace benefit, you can sign up with HR or your plan administrator to have contributions taken right out of your check before your pay hits your bank account. You don’t pay taxes on the money you contribute in the year you invest it, and if your employer provides a match, that’s free money.

Once you have maxed out the match, though, you may want to open a Roth IRA with a brokerage firm and invest some of your retirement money there, before putting more into a 401(k). Here are three big reasons why.

1. You won’t have to worry about taxes as a retiree

One of the biggest reasons to put money into a Roth IRA is the way the tax benefits work. With this account (unlike a traditional IRA), you do not get to deduct the amount you contribute from your taxes in the year you invest the money.

But, you do get to withdraw the funds tax-free in retirement (provided you follow basic requirements set forth by the IRS, such as waiting until five years after account opening to make withdrawals). This means as a senior, you aren’t going to have to worry about giving the government a cut of your retirement money and you’ll have more to live on.

Many people would prefer to get their tax savings as retirees rather than when they’re working and can more easily pay the tax man (and may be eligible for more deductions like a child tax credit if they’re raising kids). If you suspect your tax bracket could be higher as a senior, this would make sense for you.

2. You won’t have to take required minimum distributions

There’s another big benefit to Roth IRAs as well. You do not have to take required minimum distributions.

Required minimum distributions, or RMDs, are required once you reach age 72 or age 73 if you turn 72 after Dec. 31, 2022. Basically, the government requires you to take a certain amount of money out of your 401(k), traditional IRA, and other non-Roth accounts each year. That’s so it can tax the funds, since you made your contributions with money you weren’t taxed on and enjoyed tax-free growth.

If you don’t want to be stuck with the government telling you that you have to withdraw a certain amount from your retirement plan each year, then a Roth IRA could be the right choice for you, since this requirement is not imposed on this type of account.

3. You can withdraw your contributions at any time without a penalty

Finally, another reason you may want to choose a Roth IRA is that you can withdraw your contributions to it at any time without incurring taxes or paying penalties. You don’t necessarily have to wait until retirement. This isn’t the case for traditional accounts, where you face a 10% penalty in addition to being taxed on the entire withdrawal if you take your money out before age 59 ½ and don’t fall within an exception.

While it’s not generally a good idea to raid your retirement account early, you may prefer the flexibility of knowing you can access your Roth IRA money earlier if you need it for a truly pressing expense.

For all of these three reasons, consider a Roth after you’ve maxed out your 401(k) match. You can open one with just about any brokerage firm and get started investing for your future.

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