With all the different options for IRAs out there, discovering which one is right for you can seem like a daunting task. Yet, knowing your options and getting down to the nitty gritty is important when considering something as important as retirement. In this article, we will discuss Roth IRA benefits. While it’s not for everyone, it offers many advantages that make it worth considering for a retirement plan.
Roth IRA Benefits | 6 Reasons To Have A Roth IRA
In this article:
- There Is No Age Limit
- It Provides Tax-Free Income
- You Can Borrow Now if You Want To
- Your Heirs Don’t Have to Worry About Taxes
- It’s a Good Long-Term Investing Opportunity
- High-Income Earners Can Contribute
1. There Is No Age Limit
One of the best Roth IRA benefits – and the one that differs from a Traditional IRA – is that there’s no age limit on contributions or distributions.
With Traditional IRAs, making contributions is only possible up to 70.5 years old. It also requires you to take your minimum distributions after this age. A Roth IRA doesn’t have these types of conditions. People are living longer, and so is financial need. A Roth IRA lets you grow your account for a longer period of time.
2. It Provides Tax-Free Income
Another one of the many huge Roth IRA benefits is its tax advantage. In a Traditional IRA, you will pay taxes later. The tax break these types of accounts offer comes in the year you invest.
For example, you receive a paycheck. Before the government applies taxes to your paycheck, a portion of the funds from your gross income goes into your retirement account. You do not pay taxes at this time. Instead, you do it when you retire and begin withdrawing funds from the account.
With a Roth IRA, you pay taxes at the time you make Roth IRA contributions. You do not pay taxes at the time you withdraw the funds. For example, you get a paycheck. It has taxes on it like any other. You then deposit the funds into your retirement account.
The benefit of a Roth IRA is that you do not pay taxes when your money grows. All of that time your savings are invested, any appreciation in value is tax-free. This can offer you saving opportunities.
3. You Can Borrow Now if You Want To
The purpose of an IRA is to help you create a retirement account. You’re supposed to use the money when you’ve reached retirement age and have no more or fewer sources of income. Hence, a Traditional IRA penalizes and/or applies a tax on the withdrawals or distributions.
The minimum age you can withdraw from your account is 59.5 years old, but with the Roth IRA, you can do it tax-free and penalty-free if you have owned it for the last five years.
Even if you don’t meet these requirements, you may still be eligible for an exemption from either a penalty or tax (or both) if the withdrawal is necessary.
4. Your Heirs Don’t Have to Worry About Taxes
Many seniors build up valuable investments throughout their lifetime. When you pass away, those funds go to your heirs. They can go wherever you would like them to. However, with a Roth IRA, your heirs do not have to pay taxes on the distributions. With a Traditional IRA, they will need to do so. This can limit their overall access to the funds available. To make sure it can truly benefit your heirs, designate a beneficiary.
5: It’s a Good Long-Term Investing Opportunity
One of the Roth IRA benefits is that you have unique opportunities to earn money. For one, you can grow your money with compound interest.
Furthermore, for the account to earn, the institution where you open your Roth IRA will invest it in different instruments such as stocks, mutual funds, or bonds.
You also have the option to open a Self-Directed Roth IRA. A Self-Directed Roth IRA allows you to pursue other alternative investments such as real estate or even gold.
It’s also possible to make Roth IRA contributions and participate in an employer-sponsored retirement plan, which gives you more ways to save and grow your retirement money.
6. High-Income Earners Can Contribute
Because these types of accounts can lower income tax, among others, it’s possible for the wealthy to exploit it. To prevent that, the government sets contribution limits for a Roth IRA. It means those who have a certain level of income may not be able to participate.
The good news is that there are other options. You can contribute a nondeductible payment to your Traditional IRA. Then, you can convert this account into a Roth IRA. This is the basics of Roth IRA conversion.
These different Roth IRA benefits should tell you one thing: you have different options not only to earn money passively but also to consider possibilities that reduce financial worry once you retire. By doing research, staying disciplined and managing your money well, you’ll have more to enjoy during your years of retirement.
Which of these Roth IRA benefits were most helpful to you? Let us know in the comment section below!