A Roth IRA or 401 (k) is the most sensible if you're sure you'll have a higher income when you retire than you do now. If you expect your income (and your tax rate) to be higher today and lower when you retire, a traditional IRA or 401 (k) is probably the best option. RMDs could raise it to a higher tax bracket. On the other hand, qualified distributions from a Roth 401 (k) or a Roth IRA would not generate taxable income or increase your tax rate.
Therefore, a Roth contribution may be preferable to limit RMD income taxed at a higher rate. Roth IRA contributions (but not necessarily earnings) can always be withdrawn at any time or at any age without taxes or penalties. When your income exceeds the phase-out ranges, you won't be able to make a direct contribution to a Roth IRA. If your goal is retirement or long-term wealth accumulation, Guay recommends storing additional savings in a Roth IRA, which is a tax-free investment account.
Those thinking about actively trading with their Roth IRA (or traditional IRA, for that matter) should carefully consider the costs and potential benefits. If you have a significant amount of money in traditional IRAs, converting some of that money into Roth money will not only help you avoid mandatory minimum distributions (RMDs), but it will also help your heirs keep more of the money you leave them by not requiring them to pay taxes on their traditional IRA that they inherited during their potentially higher income years. The distribution rules of a Roth IRA can also help you if you intend to leave your IRA to your heirs. Since the Roth IRA eliminates one of the main trading costs (taxes), some investors may think that they can actively trade for even greater profits.
Any major brokerage firm, including Fidelity, Schwab and Vanguard, allows customers to open a Roth IRA and a taxable account at the same time, John Crumrine, CFP and founder of North Carolina-based Brunswick Financial, tells CNBC Make It. A Roth IRA is an individual retirement account (IRA) that allows certain distributions or withdrawals to be made tax-exempt, provided that specific conditions are met. Contributing to a Roth IRA or Roth 401 (k) means that you now pay a relatively low rate on taxable income. But if you have the same options in both accounts, it can make a lot of sense to contribute to a Roth IRA in your late 50s or 60s and beyond, assuming you meet the requirements.
If you don't want to be forced to withdraw money from a retirement account at age 72, the Roth IRA is your best option. Morningstar's personal finance director, Christine Benz, also recommends investing in a Roth IRA before opening a brokerage account. If you're saving for a purchase you plan to make in less than five years or earn too much to contribute to a Roth IRA, consider using a taxable brokerage account to focus your money on low-risk investments to avoid paying penalties. The Roth IRA offers an attractive offer, but you may not be able to make direct contributions if you make too much money.
The Roth IRA (individual retirement account) can be an attractive savings vehicle if you want to earn tax-free income during retirement.