Recently my partner and I have decided to lower our 401(k) contributions and save more in a Roth IRA instead. We’ve mostly been saving for retirement through my partner’s employer-sponsored 401(k), but decided that the benefits of a Roth IRA suit our financial situation better. Here are 3 reasons why we’re shifting some of our retirement savings to a Roth IRA.
You Can Withdraw Contributions Before Retirement Age
When you save money in a 401(k), you can’t withdraw any of your contributions before retirement age (which is usually 59 ½) without incurring a penalty. So if you need to tap those savings for an emergency, you’ll end up with a big tax bill.
Roth IRAs offer more financial flexibility because you can withdraw money that you’ve contributed to the account before retirement age. Keep in mind that you’ll still incur penalties if you need to withdraw any of the earnings that the investments in your Roth have accumulated. But the fact that you can tap the money you’ve contributed if needed is comforting.
I have enough savings to cover emergencies and don’t plan on withdrawing money from my retirement accounts. But you never know what could happen in the future. It’s nice to know that I could access my contributions without penalty if I had a prolonged illness or other emergency that depleted my other financial resources.
Because I’ll still be able to access the money in my Roth if needed, I’ll feel confident investing additional funds into this account. I’m more conservative about 401(k) contributions because they’re so hard to tap. But I don’t have the same reservations about a Roth IRA, which enables me to deposit any extra funds I have (up to the annual contribution of $6,500) without worrying about what I’ll do if I need that money later.
Being able to withdraw Roth IRA contributions before the traditional retirement age also makes it easier to retire a few years early. Since retiring early is one of our goals, I think it’s a good idea to start diverting some of our retirement savings into a Roth IRA and accounts that don’t place age limits on withdrawals, such as regular brokerage accounts.
Withdrawals Are Tax-Free
Another financial benefit of a Roth IRA is that withdrawals in retirement are tax-free. Roth IRAs are different from the traditional 401(k) because you deposit after-tax dollars into your Roth instead of pre-tax income. Since your Roth IRA contributions have already been taxed, you won’t have to pay taxes on any withdrawals you make down the line. Your investments will also be able to grow in the account tax-free.
The fact that Roth IRA withdrawals aren’t taxed can help reduce your tax burden in retirement, which is a big benefit. If you think you’ll be in a higher tax bracket in your golden years than you are now, investing money in a Roth IRA is prudent and could help lower your tax bill in retirement.
It’s also possible that the government could raise taxes between now and your retirement date. So incorporating a Roth IRA into your investment strategy could be a good idea even if you don’t think your tax bracket will change.
No Required Minimum Distributions
Finally, I appreciate that Roth IRAs don’t have any required minimum distributions. Many retirement accounts require you to withdraw a certain amount of money annually starting at age 73 to avoid a tax penalty. This rule doesn’t apply to Roth IRAs, giving you more freedom to decide what to do with your money in retirement.
Are you investing in a Roth IRA as part of your retirement savings strategy? Why or why not? Share your thoughts in the comments!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
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