Why Roth

How to know if you should open a Roth IRA

One of the best methods for saving for retirement is a 401(k). This is especially true if your company offers to match your contributions. However, if you don’t have access to a 401(k), a Roth IRA might be your best alternative. Here’s how to know if you should open one.

Your Tax Rate

As USA Today reports, when you make contributions to a Roth IRA, you pay your current tax rate on them. Then, when retirement comes, you can take that money out tax-free. So if you think your tax rate will be higher when you’re older, it makes sense to start a Roth IRA now. (Ditto, if you think taxes overall are going up.) If you have a high paying job late in life, plus Social Security benefits, you could end up in a higher tax bracket. That’s why a Roth IRA is good for young people. The younger you are, the less you typically earn, thus the lower your tax rate.

Your Long-term Plans

The money in a 401(k) and a traditional IRA is subject to required minimum distributions (RMDs). That means once you hit 72, you must start taking money out of the accounts. However, a Roth IRA isn’t subject to RMDs. So if you think you might want to hold off on distributions or even leave behind money to an heir, a Roth IRA might be the best move.

Your Access

One of the other benefits of a Roth IRA is the easy access to funds. Let’s say you deposit and invest $2,000 into your Roth IRA and it grows to $7,000. You can still withdraw that $2,000 contribution at any moment without paying taxes or fees. That flexibility is a nice positive of the Roth IRA.

Chris O'Shea