Roth IRAs— Reasons Why the Richest People Prefer These Over Other IRAs
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Making the right IRA choice is imperative for a great retirement plan. You need to figure out how to minimize your tax burdens, make investments that will generate high returns and find a path that gives you greater freedom over your investments.
Of all the IRA options available to people, the Roth IRA is one of the best in terms of helping you reduce your tax liability.
Considering the high individual tax rates charged on individuals, you can save hundreds of thousands of dollars of retirement money just through the tax savings alone.
The Tax Burdens on the Average American
Even though IRAs are only used after you’ve retired, the money in the IRA and any withdrawals count as taxable income.
According to the latest tax schedule, the US government charges a minimum of 10% income taxes for people belonging to the lowest income brackets—the highest tax rate is set at 37%.
Assuming that you fall in one of the higher income tiers, there’s a fair bit of money you stand to lose because of these tax rates.
The real question that you should ask yourself is whether you want to pay taxes right now, or later?
The smart answer is that you should pay them right now. Since you’re already working and have a steady stream of income, you can afford to make these tax payments because the money keeps rolling in—your IRAs will diminish pretty fast if you have to make payments later.
Plenty of Americans at this moment are disgruntled with how they still have to pay taxes even though they’re retired and it isn’t a pleasant feeling to give away the money you’ve saved all your life.
For perspective, income tax contributed to over 50% of all the tax collection in the United States— a number that totals $1.822 trillion. This isn’t counting the money paid for Medicare, social security contributions or unemployment insurance.
This is the money collected from people who have retired and are working at the moment. If you compare this number with the number of people living beneath the poverty line (15% of the whole population) it doesn’t really add up with the high taxes that you already have to pay.
These high tax rates and your well-deserved comfort in retirement calls for the creation of a better tax management plan—one that involves a Roth IRA.
Why A Roth IRA?
A Roth IRA is different from other IRAs because it only includes contributions from after taxed income.
Since you will have already paid tax on income before investing in your Roth IRA, no one can tax your income later on when you withdraw money from it.
Any investments made in the Roth IRA will also be free of any income taxes, to let you enjoy the entirety of the gains made through the investment.
Many people opt for a Roth IRA for this very reason—it’s a great way to do away with taxes altogether once you’ve retired. Even if you’re making greater returns than any income you’ve made in the past while you were working, no one can touch that money.
Some features of the Roth IRA you need to keep in mind include:
- Withdrawals from Roth IRAs are tax free.
- There is no requirement to make minimum distributions through your Roth IRA.
- There is no age limit till when you can make contributions to the Roth IRA.
- In some cases, people also qualify for a Saver’s Tax Credit.
- It’s entirely possible to legally qualify for a Roth IRA even though you make more money than the set limit.
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