61% of IRA Contributions Went Into a Roth This Past Quarter. Here's How a Roth Can Benefit You

It pays to look at this savings option.

Although it's been a brutal year for the stock market, recent data from Fidelity shows that younger generations are increasingly opening up IRAs. And that's a very good thing, because it means they're taking steps to save money for retirement in a tax-advantaged manner.

But IRAs come in two main varieties: traditional and Roth. And Fidelity also found that during the third quarter of 2022, 61% of all retirement plan contributions went into a Roth.

If you're looking to open a retirement savings account, it could pay to favor a Roth IRA over its traditional counterpart. Here's why.

1. You'll get tax-free withdrawals in retirement

Some people prefer traditional IRAs to Roth IRAs because you get an immediate tax break on your contributions with a traditional IRA. With a Roth IRA, your account is funded with after-tax dollars, so any money you put in this year won't lower your tax bill for 2022.

However, traditional IRA withdrawals taken during retirement are subject to taxes; Roth IRA withdrawals aren't. And that's a big deal.

As much as taxes might be a burden right now, imagine how stressful it might be to lose some of your income to the IRS at a time in life when you're largely living on savings and some money from Social Security. You're really likely to appreciate not having to pay taxes on your income when you're older and money may be tighter.

2. You won't have to worry about rising tax rates

Tax rates can change from year to year. And from time to time, they can change substantially when lawmakers opt to overhaul the tax code.

The upside of saving for retirement in a Roth IRA is that you won't have to worry about rising tax rates. The reason? You're locking in your tax rate on that money, so to speak, when you fund your account. Because withdrawals are tax-free, it won't matter what tax rate you're subject to in retirement, because it won't apply to the money you remove from your Roth IRA.

3. You'll get more flexibility with your savings

Roth IRAs are the only tax-advantaged retirement savings plan to not impose required minimum distributions, or RMDs. RMDs effectively force you to spend down your savings balance in your lifetime. Now that's something many seniors have to do anyway. But if you want the option to leave some money to your heirs, a Roth IRA makes it much easier.

Plus, with a Roth IRA, you don't get a tax break on your contributions. As such, if you take a withdrawal from your plan ahead of retirement to cover, say, an emergency expense, you won't be penalized for doing so as long as you only remove your principal contribution and don't touch the gains portion of your account.

To be clear, your best bet with a Roth IRA, or any retirement plan for that matter, is to leave your savings alone until you're of retirement age. And you should definitely build an emergency fund so you have money for near-term bills that are unexpected. But a Roth IRA could serve as your backup plan if you land in a truly dire financial situation.

Roth IRAs have plenty of benefits. If you're ready to start setting money aside for your retirement, it pays to consider putting money into one of these accounts.