Personal Finance

4 Reasons the Roth IRA Might be the Most Powerful Retirement Account of All Time

Maurie Backman

Published: January 31, 2025 9:35 am

Saving for retirement in a tax-advantaged plan makes a lot of sense. Why not reap some IRS benefits in the course of building your nest egg?

When it comes to finding the right home for your savings, you have choices. You could put your money into a traditional IRA for the up-front benefit of tax-free contributions. That’s something a Roth IRA won’t give you, since Roth IRAs are funded with after-tax dollars.

In spite of this, the Roth IRA may be the most powerful retirement savings tool in existence. Here are a few reasons why.

1. Investment gains are tax-free

With a traditional IRA, you don’t pay taxes on gains year to year. Rather, your gains are tax-deferred until retirement.

With a Roth IRA, however, you don’t pay taxes on gains period. And that could result in a world of savings.

Imagine you contribute $100,000 to your Roth IRA, but with shrewd investing, your balance grows to $1.5 million over time. That means you get to walk away with a $1.4 million gain free and clear.

2. Withdrawals are tax-free

Once you retire, it’s nice to not have to worry about paying taxes on your income. A Roth IRA makes that possible, since withdrawals are tax-free. And that can benefit you in a few ways.

First, not having to budget for taxes is helpful at a time when money may be tighter. Also, higher earners in retirement face surcharges known as income-related monthly adjustment amounts, or IRMAAs, on their Medicare premiums. But Roth IRA withdrawals don’t count as taxable income and therefore don’t count toward IRMAAs. That could result in savings on your Medicare costs.

3. There are no required minimum distributions

With a traditional IRA, you’re eventually forced to remove a portion of your plan balance each year in the form of required minimum distributions (RMDs). This effectively forces you to spend down your savings over time. Roth IRAs, however, don’t impose RMDs, which means you can leave your money to sit and grow tax-free indefinitely.

Plus, the fact that Roth IRAs don’t impose RMDs means you can use yours to pass down an inheritance. That could mean setting your heirs up with tax-free income as well.

4. You get maximum flexibility with your money

When you work hard to build savings, you generally want the flexibility to spend and use that money as you please. And there’s perhaps no more flexible retirement savings plan than the Roth IRA.

Because Roth IRAs are funded with after-tax dollars, there are no penalties for early withdrawals. This means that your Roth IRA can double as your emergency fund if you so choose.

To be clear, it’s best to reserve your Roth IRA for retirement and keep cash in a savings account for unplanned expenses. That’s because the value of your Roth IRA can fluctuate based on market conditions, and cashing out investments at the wrong time could lead to permanent losses.

Plus, the more money you remove ahead of retirement, the less you’ll have during retirement. But it’s still nice to get the option to tap your Roth IRA when you want to.

Is a Roth IRA right for you?

Clearly, there are many benefits to saving in a Roth IRA. To see if this account is right for you, you’ll need to consider a number of factors. These include:

• Your income. Higher earners can’t fund a Roth IRA directly, though in that case, you could contribute to a traditional IRA and convert it to a Roth afterward.
• Your tax bracket. If you’re in a very high tax bracket now, a traditional IRA may be more suitable, especially if you expect to be in a lower tax bracket in retirement.
• Your yearly savings goals. Roth IRA contributions max out this year at $7,000 for savers under 50 and $8,000 for those 50 and over. If you’re able to save beyond these limits, you may want to use a Roth IRA in conjunction with another account.

All told, your best bet is to sit down with a financial advisor and ask whether a Roth IRA is suitable for you. They can help you make the right choice based on your personal circumstances. But the takeaway here is that there’s lots to love about Roth IRAs, and using one could result in a world of financial benefits.