4 Reasons You Might Want to Choose a Roth IRA Instead of a Traditional Account

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Roth IRAs have some key benefits over traditional IRAs. You can save tax breaks for retirement and take money out on your own schedule. Find out more. 

When it comes to retirement savings, you should always contribute enough to your 401(k) to earn your full employer match if you’re eligible for one. But, once you’ve done that, you may want to invest in an IRA with a brokerage firm of your choosing so you can get access to a wider pool of investments.

You can actually choose between a traditional and a Roth IRA for your retirement investments, but they work very differently. For many people, a Roth IRA is the better choice for these four reasons.

1. You can save your tax breaks for retirement

When you contribute to a traditional IRA or a traditional 401(k), you get to deduct the contribution in the year you make it. You can’t do that when you invest in a Roth IRA.

Instead, with a Roth IRA, you save your tax breaks until later. As a retiree, you can withdraw money tax-free from your account. If your tax bracket is higher in retirement, you’ll save more in taxes because of deferring the deduction.

Of course, you also won’t have to worry about losing some of your retirement money to the government either. You’ll have more money to spend at a time when you may really need it, since your paychecks will no longer be coming.

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

With a traditional IRA or 401(k), you have to take required minimum distributions starting from age 72 or starting from age 73 if you will turn 72 after Dec. 31, 2022. This means you have to take money out of your retirement account — and pay taxes on those distributions — on a schedule the government sets for you.

You may not want to take out your money on someone else’s schedule. If you invest in a Roth instead of a traditional account, you won’t have to worry about that.

3. You won’t have to worry as much about Social Security benefits becoming taxable

Social Security benefits are taxed by the federal government only once countable income goes above a certain point. If your countable income tops $25,000 as a single tax filer or $32,000 as a married joint filer, a part of your benefits can become subject to federal income tax. Some states also tax you when your income goes above a specific level, with a few locations following different rules from the IRS and others mirroring the federal rules.

The key word mentioned above, though, is countable. Countable income equals your taxable income, half of your Social Security benefit, and a limited amount of non-taxable income like MUNI bond interest — but it doesn’t include Roth IRA distributions.

So, if you want to make sure you don’t pay taxes on Social Security benefits, putting money into a Roth can be a better choice. You won’t have to worry about taking too much out and suddenly finding yourself owing the IRS money on your Social Security.

4. You have more flexibility with withdrawals

Finally, when you put money into a Roth IRA, you can withdraw contributions without owing any tax penalties at any time — although you would have to pay taxes on earnings and gains if you withdraw them before reaching age 59 1/2.

The ability to access contributions early can provide added flexibility that could help you if you have an emergency or retire earlier than expected.

For all of these reasons, it can make sense to choose a Roth IRA when you’re deciding what kind of retirement investment account to open with your brokerage firm. Just remember to max out your 401(k) match first, because there’s no use in giving up free money.

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