If you haven’t started saving for retirement yet, now is the time to start. You will need an income apart from the benefits you receive from Social Security to meet your elderly living expenses. And the sooner you start building a nest egg, the more room you will give your money to grow.
When it comes to finding housing for your retirement savings, you have a choice. You can open a traditional brokerage account and invest in it, but in doing so, you will forgo the tax benefits offered by IRAs and 401 (k) s.
During that time, you can opt for a traditional or 401 (k) IRA and get immediate tax relief on your contributions, making it easier for you to get that money back. But if you take this route, you will be subject to taxes on any withdrawals you make in retirement. That’s why a better bet may be to open a Roth IRA or 401 (k) this year and put your retirement savings into it.
More flexibility down the line
Chances are, taxes are a source of financial stress for you right now. But think about how stressful they can 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 some of the money you withdraw from your savings as a senior. The result? More flexibility down the line and less hassle.
This is not the only reason to open a Roth retirement plan. While we know what tax rates look like right now, we have no idea if they will increase significantly in the future. But there is a good chance that it will happen.
President Biden has already made it clear that he wants an overhaul of the tax system. While the changes he is proposing really only apply to high earners, we don’t know what other changes might come. Rather than take that risk, you might be better off funding a Roth IRA or 401 (k) with money that is taxed at your current rate.
Another thing to keep in mind is that most tax-advantaged retirement savings plans impose minimum required distributions (RMDs) from age 72. Roth IRAs, however, are the only account that doesn’t require you to take them, so that alone is a good reason to open one.
If you opt for a Roth 401 (k) over a Roth IRA – for example, because you want to take advantage of higher contribution limits and / or correspondence with the employer – you will be have RMD to process in the future. The good news, however, is that these RMDs won’t trigger a tax bill for you in retirement.
Give yourself peace of mind
The sole purpose of parting with some of your income now for retirement savings is to prepare for a financially stable future. While a traditional or 401 (k) IRA can do the trick in this regard, it’s worth considering the added security of keeping your savings in a Roth retirement plan.