Why The Roth IRA Makes More Sense Than Ever During The Covid Crisis

For years, mainstream advice has been to invest most of your retirement money in conventional Individual Retirement Accounts (IRAs) or 401(k)-type vehicles.

What about their Roth versions, which feature tax-free withdrawals (if you meet certain rules), even though you have to pay income taxes on contributions? Weren’t those only for people who believed their tax rates would go up in retirement?

I’m here to rock the boat. I have no idea whether you’re going to be in a higher tax bracket when you stop working full-time. But the Roth accounts could be a better deal, even during this uncertain pandemic environment. Here’s why:

Jeanne Fisher, a certified financial planner, says “participants who are focused solely on tax rates today versus tax rates in the future are completely missing the point that all of the growth in the Roth 401k is tax-free while with a traditional 401k the contribution and the growth are taxable.”

I’ll up the ante. After age 59 1/2, you can use tax-free Roth proceeds for any reason — they don’t have to be specifically for retirement income. I tapped into my Roth a few years ago to fix a roof and replace my heating/air-conditioning system.

Although I paid taxes on the contributions years ago, I didn’t pay taxes on withdrawals. Just keep in mind that you also have to keep Roth funds in for at least five years to avoid penalties in addition to the age 59 1/2 or older age withdrawal requirement.

“If you are in a very low effective federal tax rate, or even a negative tax rate, the Roth is very beneficial. Finally, it can be used as a flexible bucket in retirement for high-income, high-net-worth clients,” Fisher says.

Of course, I am not trashing 401(k)s or traditional IRAs. Fund those, too, particularly if your employer gives you a matching contribution. But just keep in mind that the Roth is another useful savings tool — and not just for retirement.

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