If you’ve yet to begin socking money away for retirement, now’s the time to get started. You’ll need income outside of the benefits you receive from Social Security to keep up with your senior living expenses. And the sooner you begin building a nest egg, the more opportunity you’ll give your money to grow.
When it comes to finding a home for your retirement savings, you have choices. You could open a traditional brokerage account and invest there, but in doing so, you’ll forgo the tax benefits offered by IRAs and 401(k)s.
Meanwhile, you could opt for a traditional IRA or 401(k) and get an immediate tax break on your contributions, thereby making it easier to sock that money away. But if you go that route, you’ll be subject to taxes on the withdrawals you take in retirement. That’s why a better bet may be to open a Roth IRA or 401(k) this year and house your retirement savings there.
More flexibility down the line
Chances are, taxes are a source of financial stress for you right now. But think about how stressful they have the potential to be in retirement, when you’re on a fixed income.
If you open a Roth IRA or 401(k), you won’t have to worry about the IRS taking a chunk of the cash you withdraw from your savings as a senior. The result? More flexibility down the line and fewer worries.
That’s not the only reason to open a Roth retirement plan. While we know what tax rates look like right now, we have no idea whether they’ll rise substantially in the future. But there’s a good chance that will happen.
President Biden has already made it clear that he’d like to overhaul the tax system. While his proposed changes really only apply to higher earners, we don’t know what other changes could come down the line. Rather than run that risk, you may be better off funding a Roth IRA or 401(k) with money that’s taxed at your current rate.
Another thing to keep in mind is that most tax-advantaged retirement savings plans impose required minimum distributions (RMDs) starting at age 72. Roth IRAs, however, are the only account that doesn’t force you to take them, so that alone is a good reason to open one.
If you’re opting for a Roth 401(k) over a Roth IRA — say, because you want to take advantage of higher contribution limits and/or an employer match — you will have RMDs to deal with in the future. The good news, though, is that those RMDs won’t trigger a tax bill for you in retirement.
Give yourself peace of mind
The whole purpose of parting with a chunk of your income now for retirement-savings purposes is to set yourself up for a financially stable future. While a traditional IRA or 401(k) may do the trick in that regard, it pays to consider the added security of keeping your savings in a Roth retirement plan.