When it comes to saving for retirement, there’s no shortage of options. You can tuck your money into a 401(k), an IRA, a brokerage account, or even a good old-fashioned savings account (though that last one probably won’t keep up with inflation). But after years of researching the best way to grow and protect my retirement savings, I’ve come to one clear conclusion—one type of account stands above the rest.
I’m putting all of my retirement savings into this type of account. And based on the tax benefits alone, this decision could save me well over $100,000 in retirement.
Why I’m All-In on Roth Accounts
The account I’m talking about is a Roth IRA or Roth 401(k)—a tax-advantaged retirement account that offers one of the best financial perks available: tax-free withdrawals in retirement.
Unlike traditional retirement accounts, where you get a tax break when you contribute, Roth accounts require you to pay taxes upfront. But once that money is inside a Roth, it grows tax-free, and when you withdraw it in retirement, you won’t owe a single penny in income tax.
For retirees, this is a game-changer. Living on a fixed income means every dollar counts, and not having to worry about taxes taking a chunk out of withdrawals makes budgeting much easier.
But there’s an even bigger advantage that makes Roth accounts so powerful.
The Hidden Tax Savings of a Roth
Roth accounts don’t just protect your withdrawals from taxes—they also shield you from capital gains taxes and dividend taxes.
Here’s why that matters:
- When you sell investments that have increased in value, you normally pay capital gains tax, which can range from 0% to 20%, depending on your income.
- If you receive dividends from stocks or mutual funds, you could owe taxes on those as well—often at the same rate as capital gains.
For someone like me, who plans to rely on investments in retirement, these taxes could add up fast. But with a Roth, I don’t have to pay them at all.
Let’s put that into perspective:
If my investments generate $40,000 per year in dividends and capital gains, and I’d normally owe 15% in taxes, that’s $6,000 lost to taxes every year. Over a 25-year retirement, that’s $150,000 in tax savings—just for choosing a Roth over a traditional taxable account.
Roth vs. Traditional: Why I Chose Tax-Free Over a Tax Break
Traditional 401(k)s and IRAs have their benefits, too. They allow you to deduct contributions from your taxable income in the year you contribute, lowering your tax bill now. That’s a great deal if you expect to be in a lower tax bracket in retirement than you are today.
But here’s the problem: the future is unpredictable. And betting on lower taxes later is a risk I’m not willing to take.
Here are just a few things that could throw off my tax plan if I were to rely on a traditional 401(k) or IRA:
- Taxes could go up. The government could raise income tax rates in the future, making withdrawals more expensive.
- I might earn more than expected in retirement. If I end up with more income from Social Security, investments, or a part-time job, I could land in a higher tax bracket.
- I might have to withdraw more than I planned. Required Minimum Distributions (RMDs) force traditional 401(k) and IRA holders to start withdrawing funds at age 73, whether they need the money or not—potentially pushing them into a higher tax bracket.
By using a Roth account, I completely eliminate these uncertainties. No matter what happens with tax rates or my income, my retirement money is mine—tax-free.
But Are Roth Accounts Right for Everyone?
Roth accounts aren’t always the best option for every situation. There are a few key things to keep in mind:
- Not every employer offers a Roth 401(k). While traditional 401(k)s are standard, some workplaces don’t provide a Roth option. However, you can still contribute to a Roth IRA on your own if you qualify.
- Income limits apply to Roth IRAs. If you make too much money, you may not be able to contribute directly to a Roth IRA. However, there’s a legal workaround called a backdoor Roth IRA, which allows high earners to convert traditional IRA contributions into a Roth.
- Contribution limits are lower than traditional 401(k)s. For 2024, Roth IRA contributions are capped at $7,000 per year ($8,000 if you’re 50 or older). Roth 401(k)s, however, have much higher limits—up to $23,000 per year ($30,500 if you’re 50 or older).
Despite these restrictions, any amount of money you can get into a Roth account is worth it. If your employer offers a Roth 401(k), you can contribute much more than you would with just a Roth IRA.
Can’t Decide? Use Both!
If you’re torn between getting tax savings now with a traditional 401(k) or tax-free income later with a Roth, you don’t have to choose just one.
Many people opt for a split strategy, contributing to both traditional and Roth accounts. This approach provides a tax break today while still securing tax-free withdrawals in retirement.
No matter which route you take, the most important thing is to start investing early and consistently. The longer your money has to grow, the more powerful these tax advantages become.
My Plan: A Tax-Free Future
For me, the decision was clear: I’d rather pay taxes now, while I’m earning a steady income, than leave myself vulnerable to rising taxes in retirement. A Roth account ensures that my savings are truly mine to use, without the fear of unexpected tax bills.
If you like the idea of keeping more of your hard-earned money in retirement, it might be worth looking into Roth accounts, too. The tax savings could be substantial—and your future self will thank you.
