Four Reasons to Use a Roth IRA to Fund Retirement

Maura Schauss |

By Todd Youngdahl, CFP®

I recently posted a video explaining my perspective on Roth IRAs and the benefits they provide. Due to the response, I wanted to discuss the topic further. Roth IRAs are one of the most tax-efficient retirement savings vehicles out there, yet only 17% of households have a Roth account. (1) When it comes to saving for the future, many people rely on 401(k)s or traditional IRAs. While it’s wise to take advantage of matching contributions from employers in your 401(k) and contribute to a traditional IRA to lower your taxable income, here’s why you should consider using a Roth IRA to fund your retirement:

1. Tax Benefits

It can be tempting to think short-term and only invest in a traditional IRA for a tax deduction, but the Roth’s tax-free retirement income can be an even greater benefit to you. There’s no way to predict what tax rates will be when you retire, but by paying taxes up front, you could protect your savings from future tax hikes.

According to a recent study by NerdWallet, Roth IRAs beat traditional IRAs in that they net more after-tax retirement dollars when the annual maximum contribution is made. (2)

2. No Required Minimum Distributions

With most tax-deferred retirement accounts, the owner must begin taking required minimum distributions (RMDs) when they reach age 70½, regardless of whether they need the money to live. Why does this matter? Essentially, not taking RMDs means you can leave the money in your Roth to grow forever, even making more contributions after you retire if you earn an income. You can then use this nest egg as an estate planning tool to provide tax-free income for grandchildren and future generations.

3. Estate Planning

A Roth is an incredible way to leave a financial legacy for your loved ones. As you contribute, you are pre-paying taxes so that your children and grandchildren can inherit your hard-earned money without penalty. One caveat is that while you aren’t required to take RMDs with your Roth, if you use it as an inheritance your heirs will be required to make withdrawals based on their life expectancy.

4. Flexibility

While the primary goal of a Roth is to save for retirement, the way it is set up allows for plenty of flexibility if you need to tap into it for any reason. Keep in mind that if you want to avoid tax penalties, you can only withdraw your contributions, not your growth. In fact, many people use a Roth as a college savings fund. If your children do not go to college, the money is still readily available for you to use in retirement, which is not the case with 529 college savings plans. This flexibility allows you to save for retirement without worrying about your money being tied up if you need it for an emergency.

How To Get Started With A Roth IRA

There are two things to consider when deciding if a Roth IRA is the best retirement savings option for you. First, Roths have specific income limitations. In 2018, singles making over $135,000 cannot contribute to a Roth and the amount they can contribute begins phasing out after $120,000 of earnings. The phase-out period for married tax filers is $189,000-$199,000. (3) However, anyone can convert a traditional IRA into a Roth through a “backdoor conversion,” by first making a non-deductible contribution to a traditional IRA and then subsequently converting the IRA to a Roth IRA with potentially limited or no tax liability.

Second, you are allowed to contribute up to $5,500 a year or $6,500 if you are over 50. Take advantage of the annual contribution limits so that your Roth can reach its full potential and provide for you in retirement. You have until April 17th to fully fund your Roth IRA for 2017! If you are considering investing in a Roth IRA, please schedule a meeting with me today!

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