What are the benefits of a Roth IRA? Today we shall take a look at what investors stand to gain by opening Roth IRAs and using them to save and invest for their retirement years. By the end of this post, you will have a couple of pointers to help reflect upon the decision to either open a Roth IRA or to check out other alternatives. Read on to discover more.
The Roth IRA has been beloved for those who use it, and for a good reason. Regardless of your current age, this retirement investment vehicle presents you with several benefits. The amount of money you can save in your Roth IRA changes from time to time, though a provision is made for those who are aged over 50, in the way they are allowed to save an extra amount of money, referred to as a catch-up contribution. This is similar to what those with traditional IRAs get.
The main difference between Roth and traditional IRAs lies in when one is required to pay their taxes, and how much money ultimately goes to the taxman. According to most financial planners, it is advisable for people to invest in a Roth when they are younger, since they are bound to enjoy more of its benefits. That does not mean that a Roth IRA is not a good option for people of other ages.
Below are some of the top benefits of a Roth IRA.
It allows you to get tax-free income during your retirement years
With a Roth IRA, account holders get tax-free streams of income during their retirement years. This is not just for the contributions that one makes- this also applies to the investment earnings as well. This can be such a good deal for you, more so when you are looking at it from the perspective of a long-term investor, who is willing to hold on to their assets for several decades.
The only catch is that you are required to pay the taxes on the contributions upfront.
This is unlike what you get with a traditional IRA, in the way the IRS gives you a tax deduction for the year you make your contributions. With a Roth IRA, an investor contributes after-tax money right away, and they withdraw their principal and earnings tax-free upon getting to their retirement years.
For individuals who are looking for ways to diversify their retirement portfolio, a Roth IRA is a suitable option for them, since it ensures that they get to eventually enjoy a stream of tax-free income in retirement.
Your heirs benefit from your account
Roth IRA owners also have a great benefit in the way the IRS does not bother them anymore after they have paid their taxes on their contributions. They can, in fact, leave their beneficiaries tax-free income that can be stretched over a very long period of time into the future.
The good thing is that this type of account allows you to prepay taxes for future generations so that they will not have the tax man on their backs.
You can think of a Roth IRA as your estate-planning tool if the thought of leaving your grandchildren tax-free income has crossed your mind. The fact that they do not have to pay taxes in the future means that they will have a significant boost in their wealth status.
They grant you easier access to your money
A Roth IRA has the properties of an emergency account, in that you withdraw your contributions whenever you need some money to meet some urgent needs. The after-tax contributions made to a Roth IRA can be accessed at any time, although this is not highly encouraged.
The fact that you opened a Roth IRA to deposit your retirement savings means that you had earmarked those funds for future use. That said, however, you can still access the funds when the nature of your financial needs demands so.
To withdraw more than just your contributions, you must be older than 59 ½ years, and your account must have been opened more than 5 years prior to taking your distribution. There are, however, some qualified distributions, if you are below 59 ½ years, or you have not held the account longer than 5 years, which include:
- Permanent disability
- Back taxes
- Meeting health insurance expenses if you are unemployed
- Catering for the unreimbursed medical expenses that exceed 10% of one’s adjusted gross income, or 7.5% for those aged 65 years and above.
Even high-income earners can open a backdoor Roth IRA
Most high-income earners are generally locked out from opening or making contributions to Roth IRAs. This is because the IRS has set income thresholds that determine those who are allowed to open IRAs. Anyone above the set threshold cannot make direct contributions to their IRA.
There is, however, a way around this, in the way those people who earn a lot of money (more than $140,000 annually), can still make nondeductible contributions to traditional IRAs, then convert it to a Roth IRA. This is referred to as a backdoor Roth. Anyone can create a nondeductible IRA, then later convert it to a Roth IRA, so that they do not miss out on the benefits offered by this type of account.
Note that the IRS requires that you consider the necessary pretax holdings when establishing the tax liabilities that will arise from the conversion. The backdoor Roth conversion is quite complicated and requires a tax professional’s guidance and expertise.
It can be the best option for long-term investors
For those who do not want to face today’s tax bill, then opening and making contributions to a traditional IRA is the way to go. If the tax situation today does not look good, and you expect it to be more pleasant when you retire, then you should proceed to open a 401(k) or a regular IRA. Taking advantage of tax breaks today may, however, leave many valuable advantages of a Roth IRA untapped.
Those who are eligible for a Roth IRA can maximize the benefits received during their retirement years. No one can successfully predict how the tax situation will be in the future ( at least not all the time), so it can be a good idea to get done with the taxes and to focus on growing one’s wealth. This ensures that when it is time to take withdrawals, the investor will not have anyone trying to take a piece of their savings or earnings.
You can also consider opening a self-directed IRA, which is also a great retirement investment vehicle. Read our review of the best gold IRAs today.
That will be all for today’s article on what the benefits of a Roth IRA are. If you found it helpful, do let me know by dropping me a comment (below). You can also ask me any question with regards to other types of IRAs, including the gold IRAs recommended above.
I wish you well,
Eric, Investor and Team Member at Gold Retired!