The two most popular choices for retirement accounts are the 401(k) and the individual retirement account (IRA). Both types of retirement accounts have their advantages, but there are a few reasons why a Roth IRA might edge out a 401(k) in the race to retirement. Read on to find out why.

What is a Roth IRA?

A Roth IRA is an individual retirement account that supports tax-free growth and withdrawals. The 2021 contribution limit is $6,000 ($7,000 for people age 50 and older) for modified adjusted growth incomes (MAGI) below $140,000 (single filers) or $208,000 (married filing jointly). If you are 59 ½ years or older and you’ve held your account for at least five years, you can withdraw money without paying federal taxes.

Tax-Free Withdrawals

When investing in a 401(k) or traditional IRA, your savings are tax-deferred, which means that your initial contributions aren’t taxed but you will pay income taxes on your withdrawals in retirement. A Roth IRA, however, is the opposite. You pay taxes upon initial contributions, but your distributions are tax-free. You won’t need to worry about taxes affecting your disposable income in retirement with a Roth IRA. This, in turn, can help with planning and budgeting your savings.

No Taxes on Social Security

Social Security benefits become subject to tax once income hits a certain limit, and 401(k)s and traditional IRAs count in determining if your benefits are taxed. However, Roth IRA distributions don’t raise your combined income, and they won’t increase your chance of paying taxes on your Social Security benefits.

No RMDs

Required minimum distributions (RMDs) indicate the minimum amount of money that you are required to withdraw from your retirement account every year once you hit age 72. The amount is determined by the IRS. With 401(k)s and traditional IRAs, the amount of the withdrawal is taxed as income at your current tax rate. The IRS will also enforce a 50% penalty on any missed RMDs. A major advantage of Roth IRAs is that these RMD rules do not apply to them, and you are not required to take RMDs during your lifetime.

No Time Limit

You are permitted to invest money into your account for as many years as you have qualified earned income. This includes wages, salaries, commissions, and bonuses from an employer. If you are self-employed or in a business partnership, earned income would include net earnings from your business, less any deduction authorized for contributions made to retirement plans on the individual’s behalf and further reduced by 50% of the individual’s self-employment taxes. Funds connected to divorce, such as alimony, child support, or in a settlement, may also be contributed.

One Caveat

An important factor to keep in mind is the 401(k) match. If your employer matches 401(k) contributions, you would be wise take full advantage of this free investment money before contributing to a Roth IRA.