Saving thousands in taxes during retirement ensures you have more money to maximize your golden years.
A 401(k) may be the most popular retirement account, but it’s not your only option. There are several other retirement accounts that you can (and should) take advantage of throughout your career, each with its own benefits.
A Roth IRA, in particular, has a unique benefit with its tax break: You contribute after-tax money and then take tax-free withdrawals in retirement, as long as you’re 59 1/2 years old and made your first contribution at least five years ago. This retirement savings move can easily save retirees thousands in capital gains taxes.
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Roth IRA savings in action
As it stands, capital gains are taxed at either 0%, 15%, or 20%. Here’s how much retirees could save based on their investment values:
| Capital Gains | Tax Bill at 15% | Tax Bill at 20% |
|---|---|---|
| $10,000 | $1,500 | $2,000 |
| $50,000 | $7,500 | $10,000 |
| $100,000 | $15,000 | $20,000 |
| $250,000 | $37,500 | $50,000 |
| $500,000 | $75,000 | $100,000 |
Chart by author.
If the above capital gains seem farfetched in a Roth IRA, consider that investing $7,000 annually and averaging 10% annual returns could net you over $500,000 in capital gains in 25 years. Just imagine the savings for people who become Roth IRA millionaires.
Take advantage of a Roth IRA while you can
One downside to Roth IRAs is the income limit for eligibility. The silver lining, though, is that investments in your Roth IRA can continue to grow and compound even if you’re no longer eligible to contribute. That’s why taking advantage of it while you can is vital — you won’t regret it in retirement.
