When talking about retirement, most have the 401k covered: they understand the concept and (hopefully) are contributing to it. Sometimes, a 401k is not enough when it comes to retirement. Do you know when you will retire? You might think about 55, but you won’t know until you get there. Do you know how much you will need when you retire? How much you will need to live on each year? Life style inflation as we get older becomes more realistic and chances are, you will like the lifestyle you have before you retire. When you take that step to stop working, you will want to make sure that you have enough in your account to sustain the retired lifestyle that you want.
If you want more of a retirement cushion, invest in a Roth IRA. A Roth IRA is an additional investment retirement vehicle that you can max out each year at $6,500 (if under the age of 59 1/2).
Roth means that when you retire, your distributions (what you take out of the account) is tax free. This option is great because it allows your money to compound (grow) tax free.
For example: Say your IRA account is at $100,000 when you retire. With a traditional IRA, when you take the money out of your account, you will be taxed on the amount that has grown ($100,000) versus the $5,600 you put in during your 20s. Essentially, with a Roth IRA, you potentially get taxed less than with a traditional IRA.
Still confused? Check out this infographic that helps you sort out which option is best for you.
Charles Schwab put together this great infographic on whether a Roth IRA is right for you.
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