If You Want the Most Flexibility With Your Retirement Savings, Here’s the Right Account for You

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Saving here could really work to your benefit. 

It’s important to have money in savings for your retirement. Once you stop working, you can’t assume you’ll be able to get by on Social Security benefits alone. Right now, those benefits only pay the average recipient $1,827 a month. And while the average future benefit is apt to be higher due to inflation, it still likely won’t cover all of your senior living costs in full.

Rather, you’ll most likely need to supplement those benefits with another income source, like withdrawals from an IRA account. But if you’re going to make an effort to save for retirement, then it’s a good idea to choose an account that gives you the most flexibility. Here’s why Roth IRAs fit that bill.

1. You’ll enjoy tax-free gains and withdrawals

If you’ve ever sold stocks at a profit in a brokerage account, you may have been forced to pay taxes on your capital gains. With a Roth IRA, those taxes won’t come into play. Neither will taxes on your withdrawals. Rather, withdrawals will be yours to enjoy free and clear of taxes. And that could really be helpful in retirement.

Many seniors find that money is tight once they stop working and are forced to live on a combination of Social Security income and savings. So not losing a chunk of your income to taxes could give you more financial breathing room.

2. You can remove your principal contributions without penalty

The purpose of saving in a Roth IRA is to set yourself up for a secure retirement. So it’s generally best to leave your money in your account rather than take withdrawals ahead of retirement.

But sometimes, emergencies happen. You might need $5,000 for a home repair you can’t put off, and you may not want to rack up debt in the course of paying that bill.

Roth IRAs won’t penalize you for removing your principal contributions ahead of retirement, whereas traditional IRAs will. The reason? You don’t get a tax break on your contributions in a Roth IRA, so there’s no penalty for taking your money out.

But to be clear, this rule only applies to the principal portion of your Roth IRA. If you contribute $10,000 and it grows to $15,000, you can’t touch the $5,000 gains portion or you will be penalized.

3. You won’t face required minimum distributions

With a traditional IRA, you must start taking required minimum distributions (RMDs) in your 70s. This means you have to remove a portion of your savings each year or otherwise face penalties.

Up until recently, Roth IRAs were the only tax-advantaged savings plan to not impose RMDs. Thanks to a recent change, Roth 401(k)s also won’t require them starting in 2024. But either way, if you don’t want to be told what to do with your money, then a Roth IRA is a solid bet.

When it comes to finding a home for your retirement savings, you have plenty of options. But choosing a Roth IRA could benefit you in more ways than one.

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