It is important to know the many benefits of Roth IRA. Knowing them is essential in helping you decide whether this is the right retirement plan for you.
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Benefits of Roth IRA | How This Helps You Grow Your Money
7 Benefits of Roth IRA
There are many benefits of Roth IRA. Here, they’re summed up in 7 important points:
1. Tax Benefit
One of the advantages of Roth IRA is the tax benefit. This type of IRA allows you to withdraw money without incurring taxes throughout your retirement. Remember, though, you contribute using your post-tax income.
This allows the amount to continue to grow and gain income the longer it remains in savings with no penalty to you.
Another benefit is it allows you some extra savings from your income tax. With your Roth IRA contributions, you can make withdrawals anytime without having to pay taxes. However, you need to meet certain criteria.
For example, to withdraw your earnings, your account should be at least 5 years old. You should be about 59 1/2 years old at the time of withdrawal.
In certain cases, you can make withdrawals even if you are still below the age requirement. These include permanent disability or back taxes. Again, this is an exception to the rule and not the norm.
3. Continuous Contribution after Age 70 1/2 Years
One of the benefits of a self-directed Roth IRA is you can deposit funds into your account regardless of your age. Traditional IRAs have contribution limits up to 70.5 years old. As long as you’re still working or earning an income, you can grow your Roth IRA account.
4. Inherited Roth IRA
With a Roth IRA, even your loved ones will benefit from it. An inherited IRA allows your family to assume your retirement account and continue to grow its balance. You also have the option to pay the entire amount due for that tax year upfront. That way, those inheriting the account will not have to.
5. Asset Investments
Since you are already putting money in your retirement, why not invest for a higher return? A Roth IRA allows you to choose between different types of assets. These include individual stocks, index funds, lifecycle funds, and other investment alternatives.
6. “Back-Door” Entry for High-Income Earners
A “back-door” entry is the process of converting a non-deductible IRA to a Roth IRA. Generally, high-income employees are not eligible for a Roth conversion because of income limits.
Through a back-door entry into a Roth IRA, these employees can now fully utilize its benefits. Nevertheless, should you wish to pursue this approach, keep in mind your pre-tax holdings.
7. Long-Term Investment
The long-term tax advantages that come with this type of retirement savings plan are the ultimate benefit. After all, you can withdraw your money tax-free, and your account is viable as long as you want.
A Roth IRA is not a get-rich-quick scheme, but it’s a long-term, sustainable savings program. With proper management, it will prepare you for a future of financial freedom.
How Roth IRA Compares with Other Forms of Investment
Another way to highlight the benefits of Roth IRA is to compare it with other retirement investment options:
Roth IRA vs Traditional IRA
There are many different types of retirement accounts, but two of the most popular are Roth IRA and Traditional IRA. The latter seems advantageous if you want to lower your taxable income and if you earn high. Roth IRA has a phase-out range. Certain incomes may no longer qualify to contribute.
Meanwhile, one of the benefits of Roth IRA for young adults is they can start really early. Parents can set up an account on their child’s behalf. If the child is already earning money, it can be under their name.
The lack of a minimum distribution rule is helpful for modern-day Americans. These days, they are living longer and are more likely to work when they’re past 60. With no mandatory withdrawals, you can let your money grow for as long as you want.
Roth IRA vs Savings Account
A savings account is a common investment product by banks. The interests will vary depending on the type of account or plan you choose. Unlike Roth IRA’s earnings, however, this interest may be subject to tax.
You will feel the benefits of Roth IRA more strongly if you use it for retirement or for long-term projects. This may include saving for your health care, paying for a house, or spending on college. If you want the money to be more liquid (that is, you can withdraw it anytime), it may be best to go for a savings account.
Savings deposits are also more secure. The Federal Deposit Insurance Corporation (FDIC) insures your account up to $250,000. If the bank goes bankrupt or closes, you can get this amount back.
One of the benefits of Roth IRA over savings account is growth. With several investment portfolios to choose from, you can potentially increase your earnings many times over. Savings income rates are usually paltry at less than 2% per annum.
Roth IRA vs 401(k)
There are many benefits of Roth IRA over 401(k). First, you can have both. Second, you have more flexibility in terms of the growth of your retirement income. You are not under limitations set by an employer. You don’t have to pay a hefty penalty if you withdraw money before 59.5 years old, either. There’s no vesting schedule, which means you own the Roth IRA money from the beginning.
The benefits of Roth IRA make it an excellent retirement savings and investment opportunity. It is tax efficient and flexible. It allows young adults to start building their retirement or savings account. If you have 401(k), you can maximize your contributions by having Roth IRA as well. There’s no better time to invest in Roth IRA than today. The earlier you start, the longer it will grow.
What are some Roth IRA advantages you wish to add? Share them in the comments section below!
Editor’s Note: This post was originally published on February 3, 2018, and has been updated for quality and relevancy.