ROTH IRA Benefits

April 9, 2022

Topics: RMD | Retirement contributions | Retirement | ROTH IRAs

Media type: Article, Podcast

ROTH IRA Benefits

3.7 minute read • 

April 9, 2022

What are Roth IRAs? Why should you consider it?

At first glance :

A Roth IRA is an individual retirement account that is funded with after-tax money. Roths offers tax-free growth and tax-free retirement withdrawals. However, Roths has many considerations and benefits, including eligibility.

A Roth IRA can provide versatility and tax efficiency when saving for retirement. If you don’t have a Roth IRA, here are 8 reasons to consider opening one today:

1. You enjoy tax-free growth

One of the benefits of a Roth IRA is that the money you invest in the Roth IRA grows tax-free. So when you file your tax returns, you don’t have to worry about reporting investment gains, the money that made you money. On the other hand, if you invest in a non-retirement account, your income is subject to federal, state, and local taxes each year.

2. You can make tax-free withdrawals in retirement

If you are 59.5 years old and have owned your account for at least 5 years*, you can withdraw money (contributions plus earnings) from your Roth IRA without paying penalties or taxes. So even if you withdraw a lump sum in retirement, your retirement income will not be affected. This is a valuable benefit because your income affects the taxes you pay (including Social Security benefit tax) and your Medicare Part B and D premiums.

3. You decide when, if and how to withdraw funds

Unlike a traditional IRA, a Roth IRA has no lifetime minimum distributions. You are eligible at any time for tax-free, penalty-free advance withdrawals of your donations. However, if you are under age 59.5 and withdraw your contribution earnings, you may be subject to tax and withdrawal penalties on that amount. It’s a good idea to contribute to your Roth IRA and let compound interest (as your contributions earn) work. However, if you need to withdraw money from your Roth IRA, that’s fine, too.

Even if you withdraw your contribution, the money will generate income when invested in your account. This income comes back to you when you retire (again frank and net). However, you will still be bound by the IRA’s annual contribution limit, so you cannot “replace” money you withdraw and contribute to your IRA in the same contribution year.

4. You may be eligible for additional tax credits

Investors who make qualified contributions to an employer-sponsored 401(k), Roth IRA, or other retirement fund may be eligible for a retirement savings contribution credit or savings credit . Eligibility is based on a number of factors, including your adjusted gross income and the amount of your contributions to a Roth IRA or other retirement plan.

5. You may be eligible for a “Backdoor Roth IRA” conversion

If your income is too high for a Roth IRA, you can enter the Roth through the “back door.”

To use this strategy, you will make non-deductible contributions to a traditional IRA with no income limit. You will then use a Roth conversion to transfer that money into a Roth IRA. You may want to consult your financial advisor and tax professional to understand the tax consequences before acting, as Roth conversions are permanent.

6. Your beneficiaries will not be taxed

The people who inherit your Roth IRA – your beneficiaries – will need to receive RMDs (minimum required distributions), but they won’t have to pay federal income tax on the withdrawals for at least 5 years as long as the account has been opened. We can guide you through the process, but please consult your financial advisor if you have any questions.

7. You may be eligible to invest in both a Roth IRA and a 401(k)

You don’t have to think about IRAs and 401(k). As long as you qualify and meet the contribution and income limits, you may be eligible to contribute to both. The good news is that combining these plans can give you even more wealth in retirement. 8. Several investment options

Another advantage of a Roth IRA is that you have many investment options. For example, at Vanguard, you can choose from a wide range of low-cost mutual funds and ETFs (exchange-traded funds), as well as individual stocks and bonds, as well as funds from other companies.

and after

Owner of the Roth IRA

Save as much as you can and invest your Roth IRA contributions for as long as possible. Even if you have to use them, you still save for your retirement.

Don’t have a Roth IRA yet?

Learn more about Roth IRAs. So open an account and see for yourself why so many investors love them.