I wish I had a dollar for every time somebody asked me if they should invest in a Roth savings plan.

The short answer is yes.

That said, let me be real clear about this: Not everybody should – or can – invest ALL of their retirement money in a Roth. And that’s not what I’m advocating. You should learn the pros and cons of a Roth account and make the decision that’s best for you. However, since the greatest benefit of having money in a Roth account is that you don’t have to pay taxes when you pull money out, it is a good option for everyone to have.

Quick rundown on the Roth:

  • Available as an IRA or employer retirement plan (401k or 403b)*
  • The money you put in is after tax. Translation: no tax break on the dollars you put in.
  • You pay no taxes on any increase in your balance from investments.
  • Withdrawals are tax free unless:
    – you withdraw before age 59-1/2
    – your Roth account has existed fewer than 5 years
  • People with no earned income or very high income may not be eligible.
  • Contribution amounts are limited: $5,500 Roth IRA; $18,500 Roth 401k/403b (higher for people over 50)

*Not all employers offer Roth retirement plans. You may have to ask HR about it.


Plot twist: The IRS sets eligibility requirements around who can put money into a Roth IRA. First, you have to have earned income; but you can’t earn too much. The upper limit for single taxpayers in 2018 is $135,000; $199,000 if you’re married.


How a Roth can help you

Suppose you are now 60 years old and you just had your highest income year of your life. A large expense comes along that you really need to pay for but you don’t have enough in personal savings. Maybe it’s a home repair, a medical expense, or a new boat.

If you pull the money out of a traditional retirement account or IRA, you’ll owe taxes on the money that you take out (with some exceptions). And if the amount you withdraw bumps you into a higher tax bracket when added on to your regular income, you could get hit with a double whammy of taxes. But if you have money in a Roth IRA to pull from, you could do so without paying additional taxes.


Create multiple streams of income

The reality is that when we are putting money away for retirement, we never know exactly what circumstances we’re going to face in the future. So, just as it is important to diversify when we’re investing for retirement, it’s important to have different pots of money to draw from in retirement. Some money gurus refer to this as having multiple streams of income.

Traditional IRA accounts and 401(k)/403(b) retirement plan accounts with your employer offer many advantages. However, one drawback is that the money you withdraw is taxed as regular income.

The takeaway

Whether you invest the majority of your retirement savings in an IRA or your employer’s retirement plan, having some money in a Roth account can benefit you later on. By putting some of your retirement savings in a Roth, you give yourself more places to draw from in retirement and more control over your tax situation.


Important: The information provided here is for educational purposes and should not be considered advice. Before you make any final decisions, consult a trustworthy financial professional and/or tax planner.

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