3 Reasons the Roth IRA Is a Perfect Complement to Social Security

Everyone wants a big Social Security check in retirement, but it’s not easy to live off your benefits alone. Most people need a nest egg to help them cover their expenses. There are a lot of places you can keep yours, but a Roth IRA is one of the best. Here are three reasons you should make one a part of your retirement plan.

1. Roth IRAs can help you grow your savings quickly

Social Security was only designed to cover about 40% of pre-retirement income for the average worker, which means you’ll probably have to cover most of your retirement costs on your own. It’s not unreasonable to think you could need a seven-figure nest egg, especially if you live long. Saving that much isn’t an easy task, but a Roth IRA can speed it up.

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Roth IRAs enable you to invest your funds so they can grow quickly. You might only earn a few dollars in interest each year with a savings account, but you might see a 10% return or even more in a year on your investments.

Roth IRAs also give you complete control over your investments. You choose exactly what you want to invest in and change up your portfolio as often as you’d like. You can leverage this flexibility to maximize your growth potential while keeping your costs down.

Other retirement accounts, like 401(k)s, can also help you grow your savings, but they have more limitations on investment options. This can cost you in the long run.

2. Roth IRA withdrawals are tax free

Roth IRA withdrawals are tax free as long as you wait until you’re at least 59 1/2 and have had the account for at least five years. This can save you quite a bit on your retirement taxes and it’s great news for those worried about owing taxes on their Social Security benefits.

The federal government taxes the Social Security benefits of seniors whose provisional income — their adjusted gross income, any nontaxable interest, and half their annual Social Security benefit — exceeds $25,000 for a single adult or $32,000 for a married couple. Some states tax Social Security benefits, too.

It’s not always possible to avoid these taxes, but you might be able to if you stick to Roth IRA withdrawals once you near the taxation threshold for your filing status. The government won’t count these withdrawals when calculating your provisional income, so you’ll get the money you need without affecting your tax bill.

3. You can take Roth IRA withdrawals at your own time

Most retirement accounts have required minimum distributions (RMDs), which are mandatory annual withdrawals seniors must make from their retirement accounts beginning in the year they turn 72. But Roth IRAs don’t have these. You already pay taxes on your contributions in the year you make them, so you don’t owe the government anything more in retirement.

This means you can leave your money to grow in your Roth IRA as long as you’d like. If you are able to cover most or all of your retirement costs with Social Security, you can leave your Roth IRA savings as a gift for your heirs.

But a Roth IRA might not be enough on its own

While Roth IRAs have many advantages for the retirement saver, they also have one critical drawback. You’re only able to save $6,000 in a Roth IRA in 2022 if you’re under 50. Adults 50 and older can save up to $7,000. These limits are pretty low compared to other retirement accounts and they may not be enough for you, especially if you got a late start on retirement savings or plan to retire early.

You might need to pair a Roth IRA with another retirement account, like a 401(k), so you can set aside more cash for your future. Roth 401(k)s, though less common than the traditional, tax-deferred 401(k)s, are your best bet if you want tax-free retirement withdrawals. If you ever leave your job, you can roll your Roth 401(k) funds into a Roth IRA and then you won’t have to worry about RMDs.

Your savings solution is as unique as your retirement, so only you can decide which accounts make sense for you. But if you haven’t thought about opening a Roth IRA before, you may want to give it a closer look. There’s still plenty of time left to make your 2022 contributions.

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