3 Ways a Roth IRA Can Make Retirement Even Better

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May 13, 2021

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Adding a Roth IRA to your retirement plan could lead to financial rewards

For a lot of people, opening a Roth IRA can make retirement an even better phase of life. These accounts offer several unique features, discussed below, that can help you stretch your dollars a whole lot further.

1. Tax-free retirement withdrawals

The biggest appeal of Roth IRAs is that they allow you to withdraw your money tax-free as long as you follow certain rules and pay taxes on your contributions the year you make them. This makes it easier for you to manage your tax liability in retirement.

For example, if it's getting toward the end of the year and you notice you're nearing the top of your tax bracket, you can withdraw funds from your Roth IRA to avoid raising your taxable income any further and owing the government a lot more. 

Roth IRAs are typically recommended for those who are younger and those who think they're earning about the same or less than they think they'll spend annually in retirement. These workers could end up in a higher tax bracket in retirement than they're in right now. Giving the government a small percentage of their contributions today is usually a smart financial decision. 

Many people are also deciding to convert their traditional IRA to a Roth for the tax free withdrawals when they hit retirement age. When you do a conversion you will have to pay taxes on the amount converted at your tax rate for the year of conversion, but once you do so there will be no taxes on qualified withdrawals going forward.

2. Less hassle for early retirees

You are usually unable to withdraw retirement funds before age 59 1/2 without paying a 10% early withdrawal penalty. There are a few exceptions to this rule, including Roth IRA contributions. You've already paid taxes on these funds, so you're allowed to take them out whenever you want and the government won't say a word.

This makes Roth IRAs a great companion to other retirement accounts for workers who plan to retire before 59 1/2. They can still enjoy the tax advantages of saving in a designated retirement account without worrying about penalties for using their own money.

If you've contributed enough to your Roth IRA, you could use those funds exclusively to cover your retirement costs until you turn 59 1/2 and have penalty-free access to your other savings. You can also use these funds to cover an emergency expense at any age, though a designated emergency fund is usually a better option.

It's important to note that not all Roth IRA withdrawals are penalty-free. Unless you have a qualified reason (major medical or educational expense), you cannot touch your earnings without penalty until 59 ½. You must also leave all Roth IRA conversions untouched for at least five years before you withdraw them, even if you're already 59 1/2.

3. No required minimum distributions (RMDs)

Required minimum distributions (RMDs) are mandatory annual withdrawals most people must make from their retirement accounts beginning at age 72. But Roth IRAs are the only accounts exempt from this rule. You can leave your Roth IRA funds to grow as long as you'd like before you need them. This also give you the opportunity to leave a great tax-free gift to someone if you don't need all that you've saved during your lifetime. The person will have to take RMDs, unless you give the money to your spouse, but it won't raise their tax bill at all.

Different people, different tastes

Roth IRAs do have some great benefits, but they're not the right choice for everyone. Their low contribution limits -- $6,000 in 2021 or $7,000 if you're 50 or older -- make them limiting for those who want to stash away a lot of cash for retirement every year.

They could also be the wrong choice for someone who is earning a lot more today than they believe they'll spend annually in retirement. Traditional IRAs work better for these folks, because they may end up in a lower tax bracket in retirement so deferring taxes until then could help them save money.

You have to decide what works the best for you right now and go with that. You can always open a Roth IRA later on if you don't think it's a great fit right now, or you can transition to a different retirement account down the road. It's all about what suits your specific needs.

It’s never too early to start planning for retirement. Find the individual retirement account that is best for you from our variety of options. Open an IRA with Merck Employees FCU today and start enjoying one of the highest IRA rates around!


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