I Love You, Roth
Photo by Diane Helentjaris on Unsplash
Who’s Roth? Not someone whose parents had financial acumen and wanted to be edgy by naming them after their favorite investment account. I am of course speaking about Roth accounts, both Roth IRAs and Roth 401(k)s. Why do I love them so much? Let’s go through 9 of the reasons.
1) Tax diversification
They provide tax diversification.
There's a good chance most of your retirement savings are in a pre-tax 401(k) at work. Those are great because you get a tax deduction upfront when you make the contribution. That lowers your tax bill this year. The downside is that you have to pay income taxes on any withdrawals you make during retirement.
Roth accounts, on the other hand, don't give you an upfront tax deduction. But you can withdraw from them tax-free during retirement.
Unfortunately, you likely won't really know which one will be "better" for you, because it depends on what tax rates are like in the future when you're retired.
Instead of guessing, take advantage of both. And top it off with ample savings in a taxable brokerage account.
Having exposure to all three types of accounts can be very powerful. It creates "tax diversification", spreading out your assets amongst accounts with different tax treatment, giving you lots of flexibility in the future.
2) Withdraw contributions at any time
You can withdraw your Roth IRA contributions at any time, making them super flexible.
Usually, when you contribute to a retirement account, you won't be able to get to that money until retirement, unless you're willing to pay a 10% penalty.
The amount you contribute to a Roth IRA, on the other hand, can be accessed anytime. You can get your money out tax-free and penalty-free.
Sometimes life can throw you curve balls, so being able to access that money in an emergency might prove to be very valuable to you.
(Note that this does NOT apply to the earnings within your Roth IRA; it's only the amount you contribute to it. Also note that it doesn’t apply to contributions to a Roth 401(k).)
3) No taxes on withdrawals during retirement
You don't have to pay taxes on the withdrawals during retirement, which could help you in other ways.
Not paying taxes on the money is fantastic in and of itself.
But not having that money subject to income tax can also lower your taxes in other ways. Having a lower taxable income could lead to less Social Security income being taxed, lower health insurance premiums, lower Medicare premiums (IRMAA), less Net Investment Income Tax, etc.
4) Save even more money
You can effectively put more money into Roth accounts than Traditional IRAs and pre-tax 401(k)s.
Full disclosure, this isn't technically correct. The maximum contribution to Roth IRAs and Traditional IRAs is the same: $7,000 for tax year 2025 ($8,000 if you're age 50 or older). Same idea with 401(k) contributions, just a higher dollar amount.
But on a tax-adjusted basis, it's kind of like you're putting more into the Roth account.
That's because the money sitting in the Traditional IRA or pre-tax 401(k) will be subject to income taxes in the future, so you'll end up with less. It's as if the IRS has a lien on the account.
Whereas the money sitting in the Roth IRA/401(k) will never be taxed again, so the full amount is yours.
(It technically depends on what you do with the tax savings this year from the Traditional IRA/401(k) tax deduction, but I suspect most people probably won't reinvest that amount and will just spend it.)
5) Beneficiaries won’t be taxed on withdrawals
When your beneficiary inherits your Roth account, their withdrawals and/or RMDs (required minimum distributions) won’t be taxed.
The start date, frequency, and dollar amount of the RMDs that will need to be taken are dependent on many complex factors.
But regardless of those factors, your beneficiary’s withdrawals won’t be subject to any taxes. That can be a huge benefit to them, especially if they are in the higher-earning years of their career.
They can take out distributions whenever they need the money, without worrying about the tax impact.
Having that flexibility can be very powerful.
6) Better RMD rules for beneficiaries
If you pass away after your RMD age, your beneficiaries won’t have to take RMDs during the initial 9 years, which is a HUGE benefit to them.
The RMD (required minimum distribution) rules for IRA/401(k) beneficiaries are VERY complex, but when most non-spouse beneficiaries inherit a Traditional IRA after the decedent's starting RMD age, they MUST take withdrawals in the form of RMDs during the 9 years after the date of death, then empty the account at the end of the 10th year.
Beneficiaries who inherit Roth IRAs under those circumstances, on the other hand, are NOT required to take RMDs during the first 9 years. They just have to empty the account at the end of the 10th year.
This can be very advantageous for the beneficiary, as the money can be left in the Roth IRA longer, which gives it more time to grow in a tax-free manner.
7) The money isn’t subject to future rising tax rates
Current law states that, because you're paying taxes on the contribution now, the money in the Roth IRA/401(k) isn't subject to rising tax rates in the future.
Many people think income tax rates may rise in the future due to a number of factors. Namely high government spending, deficits, and debt.
Whether that actually happens or not, I don't know. But it's nice that you aren't subject to that risk for your money in a Roth account.
8) You may pay less estate tax
This is a confusing one, but bear with me…
It's possible that your estate will be subject to estate taxes in the future. The federal estate tax threshold is quite high (almost $14M as of 2025), so you may not be subject to that. But if you are, the tax rate on most assets is currently 40%. That’s right, 40% of the assets over that threshold will go to the IRS instead of your heirs.
Many states also have their own (lower) estate tax thresholds. For example, Washington State’s threshold is less than $2.2M. Some states even have inheritance taxes on money that people inherit from others.
If YOUR estate is subject to estate or inheritance taxes when you pass away, those taxes may be lower on an estate that has a Roth IRA/401(k) as compared to an estate that has a Traditional IRA/401(k).
The reason is that, all things being equal, the tax deductions you’ve received from all your Traditional IRA/401(k) contributions over the years will mean your net worth may be higher, due to not paying the taxes. That may sound good, but the estate tax percentage is then assessed against your higher asset level, resulting in a higher estate tax bill (plus the fact your beneficiaries will ALSO have to pay income taxes on the amount they receive from the Traditional IRA/401(k)).
With a Roth account, on the other hand, you've already paid the tax, so your net worth will be lower. The estate tax percentage will be assessed against that lower asset value, resulting in a lower estate tax bill.
9) More options & flexibility
Roth IRAs usually offer more investment options and flexibility than a retirement plan at an employer (such as a 401(k) or Roth 401(k)).
Many employers have great investment options in their retirement plan. But, unfortunately, many don't.
By putting more into a Roth IRA, you'll have full flexibility to invest in almost whatever you want. You can choose low-cost options that might not be available in your employer's retirement plan.
Final thoughts
So there you have it.
Aren’t you in love with Roth accounts now too? I knew you would be.