There are plenty of good reasons to keep your long-term savings in a Roth IRA. But if you’re not sure whether that’s the right account for you, ask yourself these two questions to find out.
1. Do I expect my tax rate to go up in retirement?
When you put money into a Roth IRA, you effectively lock in your tax rate on your contributions, because you pay your current tax rate on them and then take that money out 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 may be thinking, “How on earth will my taxes in retirement be higher if I’m not working?”
But who’s to say you won’t be working? Many seniors do, in fact, hold down a job, and if you earn a decent sum, that money, plus your retirement plan withdrawals and Social Security benefits, could actually bump you into a higher tax bracket than you’re in today.
Furthermore, while we know what tax rates look like right now, we don’t know if they’ll rise in the future. Therefore, if you think you might end up with a higher tax rate as a combination of personal income sources and tax policy changes, then a Roth IRA could be a good bet.
2. Do I want the option to leave money to my heirs?
The money you put into a tax-advantaged retirement account like an IRA or 401(k) can’t just sit there forever. Once you turn 72, you’ll need to start taking required minimum distributions, or RMDs, from your account, the amount of which will depend on your balance and life expectancy at the time.