The report states that Warren Buffett has millions in this type of account. Should you open one too?

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Warren Buffett is a well-known investor who has made billions of dollars. According to a recent report from ProPublic, Buffett holds millions of those dollars in a specific type of brokerage account called a Roth IRA.

Specifically, ProPublica discovered that Buffett had $ 20.2 million in his Roth IRA at the end of 2018, while his senior lieutenant at Berkshire Hathaway, Buffett’s holding company, had even more in a Roth – 264, $ 4 million.

Roth IRAs are meant to be used as a retirement savings vehicle and there are income limits for contributing. But there are also ways for rich people to invest tons of money in it, for example by using Roth conversions and buying shares of startups, which are growing exponentially.

If you don’t have billions – or even millions – of dollars, however, Roth IRAs may still be a good investment choice for you. Here’s why.

Why Roth IRAs Are a Good Option for Buffett and Other Investors Too

One of the main reasons Buffett and other Roth IRA users have accumulated so much wealth in Roth IRA is that this type of account allows for tax-free earnings. When you have money in a Roth IRA and you earn money on investments, you don’t have to pay capital gains taxes on the product like you would with investments in a Roth IRA. taxable account.

And, unlike traditional IRA accounts, money withdrawn from Roth accounts can also be withdrawn tax-free as long as you are at least 59 1/2 years old and have followed the rules about how long you are open for. account before making the first withdrawal.

Now, you don’t get an initial tax break with a Roth IRA like you would with a 401 (k) or traditional IRA. You should invest in this type of brokerage account with after-tax dollars. But it may be worth it to forgo the initial tax savings if you see explosive growth in your investments. Especially if that money isn’t taxed or if you end up in a lower tax bracket the moment you start withdrawing money from your account. If so, your outsized returns would be tax free and you would have paid taxes at a lower rate sooner in exchange for the ability to avoid being taxed at a higher rate later.

You also don’t have to withdraw money from Roth IRAs on a government-determined schedule like you do with traditional 401 (k) and IRA accounts. So the rich who raise billions can let their money grow tax-free for as long as they want and ultimately pass the account on to their heirs.

Is a Roth IRA Right For You?

Chances are your circumstances are a little different than Warren Buffett’s, but that doesn’t mean you can’t benefit from using a Roth IRA as well.

If you think you will end up paying higher taxes as a retiree than you are now, you might want to go with an investment in a Roth. You’re better off contributing with after-tax money rather than claiming your tax break up front if that gives you more tax savings down the road.

If you don’t want to have to worry about being taxed on retirement income, then a Roth is a good bet, too. Not only can you make tax-free withdrawals from a Roth as a senior citizen, the money you withdraw won’t count when the government determines whether your income has become high enough to cross the threshold at which Social Security benefits. become taxable.

A Roth could also be a good option if you plan to leave a lot of the money with your loved ones and don’t want to have to make withdrawals that you don’t necessarily need.

Ultimately, you’ll need to consider your likely future financial situation when deciding whether a Roth makes sense. But, for many people, just like Warren Buffett, this account ends up being a great option for retirement savings.

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