Is a Roth IRA Right for You? Ask yourself these 2 questions to find out | Business
There are many good reasons to keep your savings for the long term in a Roth IRA. But if you’re not sure whether it’s the right account for you, ask yourself these two questions to find out.
1. Do I expect my tax rate to increase in retirement?
When you invest money in a Roth IRA, you are effectively locking in your tax rate on your contributions because you are paying your current tax rate on them and then withdrawing that money tax-free in retirement. . As such, Roth IRAs make a lot of sense if you think you’ll have a higher tax rate as a senior than you do now.
Now you might be wondering, “How on earth will my taxes be higher in retirement if I don’t work?” “
But who can say you won’t be working? In fact, many older people are employed, and if you earn a decent amount of money, that money, along with withdrawals from your pension plan and Social Security benefits, could actually put you in a higher tax bracket. higher than the one you find yourself in today.
Also, while we know what tax rates look like now, we don’t know if they will increase in the future. Therefore, if you think you might end up with a higher tax rate due to a combination of personal income sources and changes in tax policy, then a Roth IRA could be a good bet.
2. Do I want to be able to leave money to my heirs?
The money you put in a tax-advantaged retirement account like an IRA or 401 (k) cannot sit there forever. Once you turn 72, you will need to start withdrawing the Minimum Required Distributions, or RMD, from your account, the amount of which will depend on your balance and your life expectancy at that time.