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Retirement investing is one of the most important financial goals you'll need to accomplish over your lifetime.
Fortunately, there are plenty of great investment accounts that offer tax advantages when you save for your later years. These accounts can help you invest more since the government is effectively subsiding your efforts by giving you a break on your tax bill.
But, which account is the right one for you to actually use?
That can be a complicated question to answer -- but finance expert Suze Orman has suggested a retirement investment tool that virtually everyone should make use of. If you're trying to decide where the best place is for your money, you may want to read her advice to determine if her preferred favorite account is appropriate for your needs.
What Suze Orman has to say about the Roth IRA
For Orman, a Roth IRA is the best retirement plan for most people -- and choosing to invest in a Roth IRA is a no-brainer for those who don't have access to a Roth 401(k) at work but who are eligible to contribute to a Roth IRA.
"If you are not saving for retirement in a Roth, I think there’s a good chance you are making a mistake," Orman wrote on her blog in 2021. She urges people to check out whether they can access a Roth 401(k) at work first. If you can, this will allow you to get most of the benefits this kind of account provides while still also enjoying the convenience -- and potential for matching contributions -- that comes with a workplace plan.
For those without a Roth 401(k), though, a Roth IRA is her preferred investing option because "with a Roth IRA you pay the tax right when you make a contribution, so the money you contribute has already been taxed." This is in contrast to a traditional account, which you contribute to with pre-tax dollars.
Why is a Roth IRA Orman's preferred retirement plan?
So, why would you want to contribute to a Roth rather than a retirement plan that provides an upfront tax break in the year you invest in it? Orman has explained a few key reasons why she believes a Roth IRA is the better type of account.
First and foremost, Orman touts the benefits of tax-free withdrawals, which a Roth IRA provides.
"Because you pay the tax upfront, you will never owe any tax on that money in the future. In retirement, you can withdraw money and owe no tax," she explained. In contrast, with traditional 401(k) and IRAs, you need to worry about being taxed later on in retirement, as any distributions from your account are taxed at your ordinary income tax rate.
She also warned that with most types of retirement accounts, you're eventually required to begin taking required minimum distributions. RMDs are mandated by the government after age 72 and you must take money out -- and pay taxes on your distributions -- on a schedule the IRS has set up rather than based on what's right for you. Roth IRAs don’t require you to do that.
Aside from these issues, Orman has also warned it's likely rates will be higher in the future. "Right now, it’s important to consider that federal tax rates are near historic lows," she said.
There’s no way to know what tax rates will be in 5 years, let alone 10 or 20, but given today’s low rates, it’s not out of the question that rates could move higher in the future."
If your rate goes up, then you'll be better off if you deferred the tax savings until later in life rather than benefiting from a tax break during the time you're paying less to the IRS anyway.
Orman is such a proponent of Roth IRAs that she suggests changing course and switching to a Roth even if you've already been contributing to a traditional account. The only exception is for those who are "sure your income tax rate will indeed be much lower in retirement."
For anyone else, Orman's clear opinion is that a Roth IRA is the smart choice -- and she's likely right given the likelihood of higher future tax rates and the greater potential for financial security as a retiree if withdrawals can be taken tax free.
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