Why Should I Fund a Roth IRA?

A Roth IRA provides long-term tax benefits.

If you have access to a workplace retirement plan like a 401k or 403b, you might think you have things covered. But although 401k and 403b plans are great, they might not provide enough income to meet your retirement savings goals or your retirement income needs. Supplementing those contributions with contributions to a Roth IRA can fill the gap and give you a more financially secure retirement.

Additional Retirement Income

Chances are you will need more money in retirement than you realize, perhaps as much as you did when you were working. While some expenses are likely to go down in retirement, health care expenses are likely to rise. Funding a Roth IRA gives you additional income you can tap to meet your living expenses when you retire.

Tax Savings

You can save additional taxes by funding a Roth IRA. While a Roth IRA does not provide an up front tax benefit like a traditional IRA or 401k does, the plan does provide significant tax savings down the road. That is because the money you withdraw from your Roth IRA in retirement is not subject to federal taxes. This tax-free treatment can be important when you are deciding which retirement funds to tap first and how to avoid unnecessary taxation once you stop working.

Flexibility

When you head into retirement it is a good idea to have multiple streams of income on which you can rely. These streams of income can include guaranteed payments like a monthly pension and your Social Security check, as well as payments from an immediate or fixed annuity. You can create an additional stream of income by funding a Roth IRA. With the Roth IRA, the money you withdraw is tax-free, and that gives you the ability to control your taxes by making strategic withdrawals from each of your retirement accounts.

Diversification

Investing in a 401k or 403b is a smart move, but you could find your investment choices somewhat limited. By funding a Roth IRA, you can gain additional diversification that is missing from your other retirement saving options. For instance, if you need to diversify internationally, but your 401k does not offer an international option, you could use your Roth IRA to make that investment. Investing your Roth IRA funds in asset classes not offered by your other retirement plans helps you make the most of your money.

References

• Kiplinger Magazine: Why You Need a Roth
• CNN Money: Which Has Priority - My 401k or My Roth?