When it comes to saving for retirement, you have plenty of plan choices. You could opt for a traditional IRA and get a tax break on the money you contribute. But if you're able to swing those contributions without that immediate tax break, then you may want to save for the future in a Roth IRA instead.
Roth IRAs are loaded with benefits. Not only are investment gains in a Roth IRA tax-free, but withdrawals from these accounts are tax-free as well. And at a time in your life when you may no longer be working, not having to lose a portion of your income to the IRS can be a very nice, comforting thing.
Meanwhile, you may not need to tap your Roth IRA at different points in retirement, and that's a good position to be in, too. And the great news is that Roth IRAs do not force savers to take required minimum distributions (RMDs) the same way traditional IRAs do. This gives you the option to leave your savings invested in a tax-advantaged manner even longer.
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But there's another reason to consider saving for retirement in a Roth IRA that has nothing to do with tax-free gains or RMDs. And it's a perk you may want to consider.
A Roth IRA could leave you with more Social Security
Many people are surprised to learn that Social Security income has the potential to be taxed. Whether those taxes will apply to you in retirement will depend on your provisional or combined income, which is calculated by adding up your:
- Adjusted gross income (AGI)
- Non-taxable interest income (such as the interest paid by municipal bonds)
- Annual Social Security benefit and dividing it in half
So let's say your AGI is $20,000, you receive $4,000 a year in non-taxable income, and your annual Social Security benefit is $24,000. That gives you a provisional or combined income of $36,000.
Now you'd think a combined income of $36,000 isn't that high and therefore wouldn't render you liable for taxes on your Social Security benefits. But you'd be very wrong.
If you're single, a combined income of $25,000 or more means you face taxes on some of your Social Security benefits. If you're married, that threshold rises to $32,000, but it's still, clearly, not very high.
What does a Roth IRA have to do with any of this? It's simple. Roth IRA withdrawals aren't counted in your AGI. So keeping your long-term savings in a Roth IRA could lead to a scenario where you end up avoiding taxes on your Social Security benefits.
Let's say the $20,000 AGI above is based solely on retirement plan withdrawals. With a Roth IRA, that AGI goes from $20,000 to $0. The result? A combined income that leaves your Social Security benefits untaxed, at least at the federal level. There are some states that opt to tax Social Security separately.
A really good savings plan all around
Roth IRAs are truly loaded with benefits. And the ability to avoid taxes on Social Security is just the icing on the cake.
It pays to consider housing at least some of your retirement savings in a Roth IRA. Doing so could really lead to a lot less financial stress during your senior years.
