A Roth IRA is THE best thing since sliced bread. Why? Why do I think it needs to be a part of your investment portfolio? How does it positively impact your retirement income? In this episode of Retirement Made Easy, I share why you need to make tax-free investing a bigger piece of the pie. Don’t miss it!
You will want to hear this episode if you are interested in…
- [2:37] Roth IRAs are underutilized
- [5:22] Tax-free income in retirement
- [7:48] What if you don’t have a Roth IRA?
- [10:45] Make tax-free investments a bigger piece of the pie
- [12:05] Dave Ramsey’s FREE retirement planning tool
The best thing since sliced bread
Roth IRAs are the best thing since sliced bread. Why? With a Roth IRA, you pay the taxes on the money you contribute now. That allows it to grow tax-free forever. A Roth IRA is like a birdcage. You can put anything in it (mutual funds, stocks, etc.). The cat—the IRS—can’t get to the bird in your birdcage. That money is protected.
Let’s say a 35-year-old contributes $6,000 to their Roth IRA, don’t touch it for 30 years, and they get a 7% annual average rate of return. At age 65—when they retire—their Roth IRA would be valued at $45,673! Then, they can make withdrawals tax-free for as long as they live. Nothing is better than tax-free growth of your money.
The importance of tax-free income in retirement
Why is it so important? Maybe you have a pension, social security, and rental income. They’ll all be taxed when you withdraw from them in retirement. With all of these resources that you rely on being taxed, a tax-free option for interest and income is beneficial to you in retirement.
We can’t control the cost of living in 20–30 years. We don’t know what future taxes will be. We don’t know how long we will live. But you can plan based on the knowns and the rules of today.
The biggest regret many retirees face is that they all wish that their Roth IRAs were bigger. Some clients have started encouraging their young-adult children to start with a Roth IRA. You can’t go back, but you can help your children make better choices.
Consider doing a Roth IRA conversion
If you’re under 50 you can only contribute $6,000 per person per year. If you’re over 50, you can contribute $7,000 a year. There are earnings limits and restrictions. If you make $1 million you can’t contribute to a Roth IRA—but you can look at a backdoor Roth IRA. You can do Roth conversions when you’re retired as well. You’re never too old for a Roth IRA. How nice would it be to leave your kids a Roth IRA that has been growing tax-free? They would inherit it completely tax-free.
Make tax-free investments a bigger piece of the pie
Look at your entire retirement nest egg (401k, IRA, mutual funds, etc.). Draw a circle. How much of that pie chart is pre-tax (401k, Rollover IRA, IRAs)? How much of your retirement is invested in a Roth IRA? Many people have 90% of retirement in pre-tax and only 10% in Roth IRAs. When you retire, you’re going to be paying a lot of taxes. If that Roth IRA were a bigger piece of the pie, you may pay less in taxes.
Want to take the guesswork out of retirement planning? Use this free tool from Dave Ramsey to find out if you’re on track.
Resources & People Mentioned
- Dave Ramsey’s Retirement Calculator