The Roth IRA is a powerful retirement account that’s available to Americans even if they don’t have an employer-sponsored retirement plan such as a 401(k). That is, all working Americans have access to a plan that provides serious tax advantages for retirement saving.
Here are five potential benefits of a Roth IRA and why you should consider getting one.
1. Tax-free growth and withdrawals
Let’s start with the biggest advantages of a Roth IRA, the ones that will keep the government out of your pocket permanently — tax-free growth and withdrawals.
“Roth IRAs are one of the best vehicles to save for retirement, given the tremendous benefit of tax-free growth,” says Elizabeth Evans, CFP and managing partner of Evans May Wealth in the Indianapolis area.
With a Roth IRA you contribute after-tax money to the account, so you don’t get to avoid tax on your contributions, as you might with a traditional IRA. In exchange, your money grows tax-free and you’ll be able to withdraw it tax-free at retirement, defined as age 59 ½ or older.
The Roth IRA is a powerful way to grow your nest egg. But even those who have a traditional IRA may convert it to a Roth IRA and reap the benefits. However, Congress has recently been reconsidering so-called backdoor Roth conversions, so it may make sense to act soon.
2. Pass down your money tax-free to heirs
While it can be easy to overlook, the Roth IRA is a great wealth transfer vehicle, says Evans.
The Roth IRA allows you to pass any money in the account tax-free to your heirs. Depending on the circumstances, heirs could still grow the account tax-free for years, maybe decades. But because that money is in a Roth IRA, any distributions will ultimately be tax-free to recipients.
The rules around inherited IRAs are quite tricky, however, so it’s important to understand them before diving in. But the Roth IRA puts a ton of tax-free options at the disposal of your heirs.
3. Withdraw contributions penalty-free at any time
Unlike some retirement accounts that can ding you with penalties if you need to withdraw some money before retirement, the Roth IRA allows you to withdraw contributions at any time tax- and penalty-free. The key word here is contributions, that is, only the money you’ve added. If you take out earnings before you’re able to make a qualified withdrawal, you’ll owe taxes on them.
So, a Roth IRA can offer you a lot of flexibility if you run into an emergency and need to access cash. While experts advise not tapping your account, sometimes you don’t have a choice and it can be a relief to know that you can do so without the extra burden of taxes and penalties.
4. No age limit for a Roth IRA
Your age does not prohibit you from contributing to a Roth IRA. As long as you have earned income from working (not merely investments), you can contribute to the account and take advantage at any age. Your contribution can be no more than $6,000 (in 2022) or your earned income, whichever is less. However, those over age 50 can contribute an extra $1,000 per year.
In addition, non-working spouses can contribute to a Roth IRA if they have a spouse who earns income. Here are the details on the spousal IRA.
5. Roth IRAs don’t have required distributions
The traditional IRA has them. As do the traditional 401(k) and Roth 401(k). Yes, of the major retirement accounts, only the Roth IRA does not have required minimum distributions (RMD). As the name suggests, an RMD forces you to take a minimum distribution from your account at least annually. With an RMD, you’ll be forced to withdraw money whether you need it or not. And that means taxes and a halt to the tax-advantaged compounding inside the account.
But the Roth IRA avoids required minimum distributions entirely, meaning you can compound as long as you like, even passing that money untouched to your heirs tax-free (see above).
“Put your money to work and allow it to grow and compound for decades to come,” says Evans.
These are some of the top reasons that many retirement experts think the Roth IRA is the best retirement account around. The Roth IRA offers you tons of flexibility as well as the ability to grow your money tax-free, potentially for decades.
Written by James Royal, senior investing and wealth management reporter.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.