Saving for retirement is about more than growing your nest egg: It’s also about gaining an edge when it’s time to take your money out. And that’s where the Roth IRA shines.
The Roth IRA is an individual retirement account that comes with perks that traditional IRAs don’t offer. The biggest benefit of the Roth IRA is how tax-friendly it is. Although you can’t take a tax deduction on Roth IRA contributions, the money you sock away grows tax-free and also comes out tax-free, provided you follow the withdrawal rules. A Roth IRA will give you a tax-free income stream in retirement. You can keep more of what you earn.
“Having sources of tax-free income in retirement makes more of your retirement dollars available for lifestyle expenses,” said Rob Burnette, investment adviser representative at Outlook Financial Center. “The old adage ‘It isn’t what you make that is important, it’s what you keep’ certainly applies to the Roth IRA.”
Another major benefit: You don’t have to take required minimum distributions (RMDs). In contrast, beginning in 2023, the IRS requires holders of traditional IRAs to start taking RMDs by April 1 of the year after they reach 73. With a Roth IRA, your money has more time to grow tax-free.
“Since RMDs are never required in Roth IRAs, this enables better control of your retirement account drawdown rates and easier tax planning during retirement,” said Kelly Gilbert, fiduciary investment adviser at EFG Financial. “Contrast that to a traditional pretax IRA which mandates RMDs at a certain age: This drawdown rate and excess taxation can drain traditional IRA accounts faster than planned, and no one wants to run out of money.”
That extra time you gain by not having to take withdrawals means both your principal and your earnings can take advantage of compounding, which has the power to transform a humble account balance into a much more sizable one if financial markets rise in value, Gilbert said.
“If you retire at 62 with $100,000 in your Roth IRA, 10 years later it may be worth $250,000, and 20 years later nearly $675,000,” said Brandon Reese, senior wealth adviser at TBS Retirement Planning, using an average annual return of 10 percent to arrive at his guesstimate.
For the 2023 tax year, the maximum contribution is $6,500, or $7,500 for those 50 or older who take advantage of the $1,000 catch-up contribution. You can contribute to a 2023 Roth IRA until the April 15 tax filing deadline in 2024. For the 2024 tax year, you can save even more because the contribution limits are adjusted for inflation each year. For 2024, the max Roth IRA contribution limit rises by $500 to $7,000, or $8,000 for people 50 or older.
Gilbert recommends maxing out your Roth IRA each year if possible. The reason? “Mathematically, a Roth IRA will always be more beneficial than a pretax IRA if taxes remain the same or go up in the future,” Gilbert said. “And most everyone agrees that taxes are going up in the future.”