Saving for retirement is a major goal of mine.
I know very well that the Social Security benefit I’m likely to collect won’t be enough to provide for the retirement I want. And while I don’t have extremely lofty goals — I’m not planning to buy a yacht, though an RV is on my list — I do want to land in a position where I can enjoy my senior years to the fullest.
It’s for this reason that I contribute money regularly to my solo 401(k) which, thankfully, comes with higher annual contribution limits than a regular 401(k). I’ve also, in the past, put money into a SEP IRA.
But one retirement account I won’t be opening anytime soon is a Roth IRA, even though there are many benefits to going this route. Here’s why.
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1. I’m not convinced I’ll have a higher tax rate in retirement
When you fund a traditional IRA or 401(k) plan, your contributions go in tax-free, and you shield some of your near-term income from the IRS. Roth IRA contributions are made with after-tax dollars, so there’s no immediate tax break to enjoy. However, Roth IRAs also allow you to withdraw your money tax-free in retirement, whereas traditional retirement plans do not.
Roth IRAs make a lot of sense when you expect your tax rate to be higher in retirement than it is now. That way, you effectively lock in your tax rate on that money by getting those taxes over with.
But I’m not sure my tax rate will be higher in retirement than it is today. Right now, I put in many, many hours a week at my job because I have to keep up with my mortgage payments, cover a host of child care expenses, and sock funds away for my kids’ education.
Once I’m retired, those costs shouldn’t apply, and so I shouldn’t need to earn as much. And if I work a lot less, or not at all, then I might have a much lower annual income and tax rate — even if I take a decent chunk of money out of my retirement plan each year.
Also, while I don’t know exactly what my tax rate will be in retirement, what I do know is that my tax burden is pretty significant right now. And so it makes sense for me to shield some of my income from the IRS by getting a tax break on my retirement plan contributions.
2. I don’t want the temptation to pull my money out early
The money I have in my current retirement plan can’t be touched before age 59 1/2. If I take an early withdrawal, I’ll face a 10% penalty.
Because Roth IRAs are funded with after-tax dollars, you can withdraw your principal contributions at any time without being penalized. It’s only the gains portion of your Roth IRA that you can’t touch before age 59 1/2.
For some people, that flexibility is a good thing. But I don’t want the temptation.
Through the years, I’ve been hit with my share of unplanned expenses — like the time I had to spend many thousands of dollars to regrade my entire property or the time I had to replace my car when a minor accident totaled it. Had I had a Roth IRA, I might’ve raided it to cover those bills instead of skipping planned vacations and busting my tail to work longer hours to make up the money.
But in reality, I’m thankful I didn’t have that option. I need the money in my retirement plan to be there for — you guessed it — retirement. And so I’d rather make it more difficult on myself to access it ahead of that milestone.
While a Roth IRA may not be right for me, that doesn’t mean other savers can’t benefit from opening one. It definitely pays to read up on Roth IRAs and learn more about the perks they offer.