Image source: Getty Images
Saving for retirement is most Americans’ biggest financial goal. It can take hundreds of thousands of dollars, or more, to enjoy a happy, secure retirement.
Looking for a secure place to grow your savings? See our expert picks for the best FDIC-insured high-yield savings accounts available today – enjoy peace of mind with competitive rates.
That’s why we need to make the most of our retirement savings. That means investing as much as possible and using retirement accounts that offer big tax breaks.
Yet millions of American workers don’t use one of the best retirement accounts out there. Let’s go over what it is, how it works, and how it could save you huge sums of money.
Only 17% of workers who have access to a Roth 401(k) contribute to one, according to Vanguard’s 2024 “How America Saves” report. That’s despite the fact that 82% of 401(k) plans offer a Roth account.
If your employer offers a Roth 401(k), then you may want to start contributing to it now. Here’s why.
A Roth 401(k) is a lot like a traditional 401(k). For example:
But there’s one big difference between Roth 401(k)s and traditional 401(k)s.
Traditional 401(k) contributions are free from income tax, which means you get an upfront tax break. But when you retire, you’ll pay income tax on the money you withdraw.
Roth 401(k) contributions are subject to income tax, but qualified withdrawals are not. That means your Roth 401(k) can be a source of tax-free retirement income.
Traditional and Roth 401(k)s are both fantastic retirement savings accounts. And there’s a good argument for picking a traditional 401(k): If your income is higher now than you expect it to be in retirement, then the upfront tax break will, in theory, save you more money.
But the reason I invest in a Roth 401(k) is that the future is uncertain. Even if retirement is only five years away, any number of things could throw your plan off track.
For example:
A Roth 401(k) takes a lot of uncertainty out of the equation. You’ll pay more in taxes now, but you’ll rest easy knowing that you’ll save a bundle on income taxes once you’re retired and living on a fixed income.
Some employers don’t offer Roth 401(k)s. The good news is that you can enjoy all the same benefits (except for an employer match) with a Roth IRA. This is a type of individual retirement account that allows you to contribute up to $7,000 per year (or $8,000 if you’re 50 or older).
You can open a Roth IRA through almost any stock broker, so long as your income isn’t over a certain amount (read up on the Roth IRA rules to find out). Roth IRAs also have one huge benefit that Roth 401(k)s don’t: endless investment options. While a 401(k) comes with a limited menu of investments, a Roth IRA lets you choose from thousands of stocks, funds, bonds, and other investments.
I recently opened a Roth IRA, and the whole process took minutes. I set up recurring investments in an S&P 500 index fund, so I’m getting a diversified stock portfolio with almost no work. Even better, my broker matches 1% of my IRA contributions.
Ready to open a Roth IRA and start building tax-free retirement income? Click here to see our list of the best Roth IRA brokers and open an account today.
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
SoFi disclosure:
⁸ Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
—
Blog powered by G6
Disclaimer! A guest author has made this post. G6 has not checked the post. its content and attachments and under no circumstances will G6 be held responsible or liable in any way for any claims, damages, losses, expenses, costs or liabilities whatsoever (including, without limitation, any direct or indirect damages for loss of profits, business interruption or loss of information) resulting or arising directly or indirectly from your use of or inability to use this website or any websites linked to it, or from your reliance on the information and material on this website, even if the G6 has been advised of the possibility of such damages in advance.
For any inquiries, please contact legal@gsix.org
