Stressed About Paying Taxes in Retirement? Here’s Why a Roth IRA Could Be the Best Savings Tool for You
Taxes are an inevitable expense we’re all forced to bear — both during our working years as well as in retirement. But the idea of paying taxes on your senior income may be enough to stress you out.
Many people see their income take a serious hit once their careers come to a close. And that makes sense. It’s difficult to save up enough money to replace your complete salary for what could be 20 years, 30 years, or more.
But if the idea of having to pay taxes on your retirement income is worrisome for you, it pays to house your long-term savings in a Roth IRA. Not only will you not have to worry about taxes on withdrawals, but you might reduce your tax burden in retirement in other ways.
Tax benefits galore
There’s a reason so many people like Roth IRAs: When you put money into one of these accounts, you don’t get an immediate tax break, but you do get to enjoy tax-free investment gains and tax-free retirement withdrawals. The latter is important, as it could make it easier for you to manage financially once you move over to a fixed income.
But it’s not just retirement plan withdrawals that are tax-free when you house your savings in a Roth IRA. You might also manage to avoid taxes on your Social Security benefits by virtue of having a Roth IRA.
See, Social Security benefits aren’t guaranteed to be tax-free. In fact, many seniors are subject to taxes on those benefits due to having too high a provisional income.
Your provisional income is basically half of your annual Social Security benefit, plus your non-Social Security income (including tax-free interest payments you collect). Once that income reaches $25,000 for singles and $32,000 for married couples filing jointly, taxes on Social Security come into play.
Clearly, these aren’t very high thresholds, which means that it’s easy enough for retirement plan withdrawals to propel you into the category of having your Social Security benefits taxed. But the great thing about having a Roth IRA is that your withdrawals from that account won’t count toward your provisional income.
So, let’s say you’re a single retiree collecting $20,000 a year in Social Security. Let’s also imagine you withdraw $1,500 a month, or $18,000 a year, from a traditional IRA to supplement your benefits. In that case, you’re looking at a provisional income of $28,000, which means taxes on your benefits would come into play. But with a Roth IRA, that $18,000 in withdrawals wouldn’t count toward provisional income, leaving your Social Security benefits free of taxes (at least at the federal level — some states do charge taxes on those benefits).
Don’t stress about future taxes
It’s one thing for the IRS to take a chunk of your money while you’re still working, but it’s another thing to lose a substantial portion of your retirement income to taxes. If you’d rather avoid the latter scenario, a Roth IRA is definitely worth considering.
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