6 Reasons Why I Prefer a Roth Retirement Plan

Speaking generally, we are living in a great time because we have choices for our retirement plans. Unfortunately, it has not always been that way. Now there are retirement options for you as soon as you earn your first dollar! Which is when I advocate for you to start saving. There is no better time than the present.

On a broad scale, you have two types of retirement options:

1. Traditional

2. Roth

Within each of those you can have a 401(k) (if your employer provides this benefit) or an IRA, also known as Individual Retirement Arrangements, but this post is to help guide you between the broad scale of your retirement options.

Why I personally choose Roth:

I see so many more benefits to a Roth fund than a traditional and here is why:

1. Knowledge is Power

   Roth’s take out taxes when you contribute to the fund as oppose to at retirement like a traditional retirement fund.

   You know what your tax bracket is right now. I do not know about you, but that is pretty powerful to me. I can plan and rationalize the taxes that are being withheld now. I know my income tax at the end of year, now.

2. Uncertainty in the Future

   In 2018, we went through a huge tax reform that heavily leans in favor of the upper half. This was an eye opening experience that solidified my opinion that Roth’s are better. I mean, pretend you became a millionaire and in retirement another tax reform pushes through that goes against the upper half and all your planning and saving will have been for nothing.

   Well, not nothing but it will definitely put a damper on it. But it goes back to not knowing what the future will look like. If you plan big, you know for a fact that your bases will be covered.

3. Security and Certainty for the Future

   This ties into the previous point, but is also a point all in itself. I am okay with taking the hit of not lowering my taxable income now because I would rather owe the IRS now than later. I know what my position is this year but I could be dead-ass broke in retirement and do not want to feel disappointed or scared when the retirement checks start coming in.

   I am a planner and like to mitigate risk. If you are too, you want to feel as secure as possible while in retirement. This equates to seeing your taxes being paid now as opposed to in the future.

4. Diversification

   Any money you put towards your Roth 401(k) is an after-tax contribution. However, any money your employer puts towards your 401(k) is not and gets allocated to another linked account. This is because a Roth account can only hold already taxed funds.

   This sets up a small form of diversification for you and allows a portion of your taxes to be paid in retirement.

   You are probably thinking ‘Audrey, you just said you do not want this!’

   While that is true, diversification is always the golden rule. If you put all your eggs in one basket, that is a way heftier risk than even taking the safe route.

5. Less restrictions than a traditional IRA

   Just between the two IRA types, traditional funds require you to make mandatory minimum withdrawals at a certain age, whether you need it or not. Roth’s do not, at least as of the writing of this post in January 2023.

   Roth’s do not have age restrictions that traditional funds have and also do not have minimum withdrawal amounts. That is huge for you in retirement because it lets you go at your own pace.

   Traditional funds tax and penalize you on pre-retirement withdrawals that do not meet the pre-defined list of acceptable reasons. With Roth’s, you may withdraw amounts equal to your contributions before hitting your retirement age.

   While Roth’s do have fewer restrictions, something for you to keep in mind is that they also come with fewer tax breaks and have income restrictions (which will be covered in the next point).

6. No Income Restrictions on 401(k)’s

   This is more a preference over Roth 401(k) than Roth IRA.

   Let us go back to planning to be millionaires – it is fun, right!?

   High income individuals cannot set up a Roth IRA but are allowed to be a part of a Roth 401(k)’s. These income limits fluctuate yearly and depend on your filing status, but as a very general broad gauge, it is $120,000+/year. Which makes the 401(k) a significant tax advantage for high earners.

   There are some ways around the income limit in an IRA, but that gets complicated and I would recommend speaking to a professional about that. Roth’s are becoming increasingly popular the more people understand the differences and how they can benefit from them. Do not hesitate to consult your CPA or company HR manager when setting up your plans.

In conclusion, while I strongly recommend a Roth fund, always diversify. As much as you can, where ever you can, whenever you can. If holding both a Roth and traditional retirement account is an option for you, doooooo it. This allows you to break up your tax liability between paying now and paying later and help mitigate any risk.