Why a Roth IRA or 401(k) may be a better choice for retirement savings
I've been investing my retirement funds into Roth accounts for over a decade. While traditional retirement accounts are a great choice for many, there's one reason why I love Roth accounts. Hint: It's not just the tax savings.
What is a major benefit of a Roth retirement account?
Many people love Roth accounts because they are funded with post-tax dollars. That means you invest money into these accounts that you've already paid taxes on. So, you pay taxes on the money today, but then that money grows tax-free forever, even when it comes time to withdraw.
Traditional IRAs or 401(k)s, meanwhile, are funded using pre-tax dollars. That means you don't have to pay taxes on the earnings today, and you don't have to pay taxes as the money grows, either. But when it comes time to withdraw, the tax bill will finally come due.
When comparing the tax savings of a Roth versus a traditional retirement account, often the difference isn't huge. The biggest difference is typically when you get the tax savings: Either now or far into the future. This is why I love Roth accounts -- they're doing your future self a huge favor.
How much tax do you pay on retirement withdrawals?
When it comes time to withdraw retirement savings, many people are shocked at how much taxes can put a dent in their nest egg. A $1 million account may actually have just $700,000 left after taxes. That's a big gap!
What Roth accounts allow you to do is see exactly how much you'll have available for retirement. What you see is what you get. And while you can always do the math on a traditional retirement account to determine your future tax burden, Roth accounts certainly simplify the equation.
I love Roth retirement accounts because they make life easier for your future self. When it comes time to retire, you won't face any tax bills with these accounts. That means you won't find yourself with far less than you anticipated due to an unexpected tax burden.
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