Everyone desires a large Social Security check in retirement, but it can be difficult to survive solely on benefits. The majority of individuals require a nest egg to cover their expenses. There are numerous storage options, but a Roth IRA is among the best. Here are three reasons why you should include one in your retirement strategy.
Roth IRAs can accelerate the growth of your savings.
Social Security was only intended to cover about 40 percent of the average worker’s pre-retirement income, so you will likely be responsible for the majority of your retirement expenses. It is not unreasonable to believe that you may require a seven-figure nest egg, particularly if you live a long life. This is not an easy amount to save, but a Roth IRA can expedite the process.
Roth IRAs allow you to invest your funds for rapid growth. With a savings account, you may only earn a few dollars in interest each year, but with investments, you may earn 10 percent or more annually.
In addition, Roth IRAs give you total control over your investments. You decide precisely what you want to invest in and can alter your portfolio whenever you like. This flexibility allows you to maximize your growth potential while minimizing expenses.
Other retirement accounts, such as 401(k)s, can also help you grow your savings, but their investment choices are more limited. This can have long-term consequences.
Withdrawals from a Roth IRA are tax-free
Withdrawals from a Roth IRA are tax-free if you are at least 59 1/2 years old and have held the account for at least five years. This can save you a substantial amount on your retirement taxes and is great news for those concerned about owing taxes on Social Security benefits.
Seniors whose provisional income — their adjusted gross income, any nontaxable interest, and half of their annual Social Security benefit — exceeds $25,000 for a single adult or $32,000 for a married couple are taxed on their Social Security benefits. Some states also impose taxes on Social Security benefits.
It is not always possible to avoid these taxes, but you may be able to do so if you stick to Roth IRA withdrawals as you approach the tax threshold for your filing status. The government will disregard these withdrawals when calculating your provisional income, so you’ll receive the funds you need without incurring additional tax liability.
The majority of retirement accounts have required minimum distributions (RMDs), which are mandatory annual withdrawals from the account beginning in the year the account holder turns 72. But Roth IRAs lack these features. You already pay taxes on your contributions in the year they are made, so you owe nothing to the government in retirement.
This means you can leave your money in your Roth IRA to grow for as long as you like. If you can cover all or the majority of your retirement expenses with Social Security, you can leave your Roth IRA funds to your heirs.
But a Roth IRA may not be sufficient on its own.
While Roth IRAs offer numerous advantages for retirement savers, they have one significant disadvantage. You can only contribute $6,000 to a Roth IRA in 2022 if you are under 50 years old. Adults older than 50 can save up to $7,000. These limits are relatively low compared to other retirement accounts, and they may not be sufficient if you started saving for retirement late or intend to retire early.
You may need to combine a Roth IRA with another retirement account, such as a 401(k), to save more money for the future. Roth 401(k)s, despite being less prevalent than traditional, tax-deferred 401(k)s, are your best bet if you desire tax-free retirement withdrawals. If you leave your job, you can roll your Roth 401(k) funds into a Roth IRA, and you will no longer be subject to RMDs.
Your retirement savings strategy is as unique as you are, so only you can determine which accounts make the most sense for you. If you haven’t previously considered opening a Roth IRA, you may want to reconsider. There is still ample time to make contributions for 2022.