Retirement savings are my main goal.
I know very well that Social security the benefit I will probably collect will not be enough for the pension I want. And while I don’t have extremely lofty goals – I don’t plan on buying a yacht, even though the RV is on my list – I want to land in a position where I’ll be able to fully enjoy my older years.
For this reason, I regularly pay extra for my solo 401 (k) which, thankfully, comes with higher annual contribution limits than the regular 401 (k). In the past, I have also put money into the SEP IRA.
But one pension account that I will not open soon is Roth IRA, although there are many benefits to navigating this route. Here’s why.
1. I am not convinced that I will have a higher tax rate in retirement
When you fund a traditional IRA or 401 (k) plan, your contributions are tax-exempt and you protect part of your short-term income from the tax administration. Roth IRA contributions are made with dollars after tax, so there is no immediate tax relief to enjoy. However, Roth IRAs also allow you to withdraw money tax-free in retirement, while this is traditional pension plans don’t.
The Roth IRA makes a lot of sense when you expect your tax rate to be higher in retirement than it is now. That way you effectively lock your tax rate on that money by ending those taxes.
But I’m not sure that my tax rate will be higher in retirement than it is today. See the article : Coronavirus Pandemic Spurs Record Amount of Savings in San Diego and Beyond – NBC 7 San Diego. I currently work many, many hours a week at my job because I have to keep up with mortgage repayments, cover a multitude of childcare costs, and raise funds to educate my children.
When I retire, those costs shouldn’t be valid, so I shouldn’t be earning that much. And if I work a lot less or don’t work at all, then I could have a much lower annual income and tax rate – even if I take a decent chunk of money out of my retirement plan every year.
Also, although I don’t know exactly what my retired tax rate will be, what do I do to do I know that my tax burden is quite significant at the moment. And so it makes sense to protect part of my income from the tax administration with tax relief on contributions to my retirement plan.
2. I don’t want to be tempted to pull my money out early
The money I have in my current retirement plan cannot be touched before I am 59 years old. This may interest you : Tax Day is Monday. Here’s what you need to know after a year of pandemic stimulus checks. If I withdraw immediately, I will be fined 10%.
Because the Roth IRA is funded in dollars after tax, you can withdraw your major contributions at any time without being penalized. That’s just part of winning your Roth IRA that you can’t touch before 59 1/2.
For some people, that flexibility is a good thing. But I don’t want temptation.
Over the years, I’ve been hit by my share of unplanned expenses – like the time I had to spend thousands of dollars to rebuild an entire property or the time I had to replace my car when a minor accident happened. If I had a Roth IRA, I might have fallen into it to cover those bills, instead of skipping planned vacations and exterminating the tail to work longer to make up for the money.
But in reality, I’m thankful I didn’t have that opportunity. I need money from my retirement plan to be there – you guessed it – for retirement. And that’s why I’d rather make it harder for myself to access before that turning point.
While the Roth IRA may not be right for me, that doesn’t mean other savers can’t benefit from the opening. It’s definitely worth reading the Roth IRAs and learning more about it the benefits they offer.