Is a Roth IRA Right for You? Answer These 3 Questions to Find Out

Saving for retirement is something it pays to commit to at as early an age as possible. You’ll need income outside of Social Security to cover your senior living expenses, and that’s where your retirement plan contributions come in.

When it comes to choosing a savings plan, you have options. But it definitely pays to put a Roth IRA on your radar. If you’re not sure a Roth IRA is right for you, run through these questions to find out whether it’s a good bet.

1. Do I expect my tax rate to be higher in retirement?

When you save money in a Roth IRA, you pay taxes on the funds you contribute and forgo the immediate tax break you get with a traditional IRA or 401(k). In exchange, you get to enjoy tax-free investment gains and tax-free withdrawals during retirement.

If you anticipate being in a higher tax bracket as a senior than you are today, then a Roth IRA makes a lot of sense. And if you’re not sure how your tax bracket situation will shake out, ask yourself how much money you think you have the potential to save. If you’re aiming for a few million dollars, you may end up more financially comfortable as a senior than you are today.

There’s also a chance tax rates will rise broadly over time. If you’re many years away from retirement, you may want to lock in your current tax rate by funding a Roth IRA.

2. Do I need a tax break right now?

Many seniors are burdened with taxes at a time when money is tight. So if you’re not desperate for a tax break right now, you may want to consider putting your money into a Roth IRA. Here’s another way to think about it — if you’re able to fund your retirement plan in the absence of a tax break, then a Roth IRA may be a good bet.

3. Do I want more freedom with my savings later in life?

Roth IRAs are the only tax-advantaged retirement plan to not impose required minimum distributions, or RMDs. RMDs force you to remove a portion of your savings balance each year. Once that happens, you lose out on the option to keep that money invested in a tax-free fashion.

Different people have different goals for their retirement savings. You might assume you’ll need all of that money to cover your senior living costs. But if you’re anticipating a larger nest egg and want the option to leave some of that money behind to your heirs, then a Roth IRA is the one retirement plan that could make that pretty easy to do.

While a Roth IRA certainly isn’t your only option for saving for retirement in a tax-advantaged manner, it’s a solid plan choice worth considering. And if your income is too high to fund a Roth IRA directly, remember that you can always contribute money to a traditional IRA and then convert it to a Roth after the fact.

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