Roth IRAs Are Awesome, but Here’s Why I Won’t Open One

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It’s not the right account for me. 

I’m a firm believer in saving for retirement. Even though I do a lot of reading on Social Security and know it’s not in danger of disappearing completely, I don’t want to become too reliant on benefits that have the potential to get cut.

And also, living on Social Security alone is not a good idea. Those benefits will generally replace just 40% of your income if you earn an average salary. And most retirees need a lot more income than that to live comfortably.

That’s why I make a point to contribute steadily to a retirement savings plan. I used to fund a SEP IRA, which is similar to a traditional IRA in that contributions go in on a pre-tax basis and withdrawals are taxed in retirement. Now, I fund a solo 401(k), which is a 401(k) plan self-employed people are eligible for (SEP IRAs, too, are for the self-employed).

Meanwhile, I often find myself singing the praises of Roth IRAs — and encouraging friends of mine to open and save in one. But I won’t be saving in a Roth IRA myself anytime soon. Here’s why.

I don’t think I’ll benefit from a Roth as much as some people

Roth IRAs don’t give you a tax break on your contributions like traditional IRAs. But they allow your investments to grow tax-free, and they give you tax-free withdrawals in retirement. They’re also the only tax-advantaged retirement plan that doesn’t force you to take minimum distributions at a certain point in time.

Despite these perks, the main reason I won’t save for retirement in a Roth IRA is simple — I think I’ll reap more tax savings by sticking to a traditional retirement plan that gives me a tax break on my contributions.

By saving in a solo 401(k) now (which, for tax purposes, works just like a traditional IRA), I get a tax break on the money I put in. Specifically, I get to exempt a portion of my income from taxes. So if I put $20,000 into my solo 401(k), I don’t pay taxes on $20,000 of earnings.

Meanwhile, I expect to be in a lower tax bracket in retirement than I’m in today. My husband and I both work full-time jobs and earn decent incomes. Come retirement, we expect our income to go down because we’ll likely be limited to withdrawals from our retirement savings and Social Security (though I do hope to continue working as a retiree if that option presents itself). And so a Roth IRA doesn’t make sense for me because I’d rather snag a tax break at a time when my tax bracket and liability are higher.

Think about the big picture

The idea of tax-free retirement plan withdrawals sounds really nice. But I stand to reap more savings by snagging a tax break at a time when I’m in a higher tax bracket, not a lower one.

Granted, we don’t know what tax brackets will look like down the line. But assuming they don’t change so drastically, this setup makes sense for me. If tax rates start to change, I may need to reconsider my thinking, though.

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