A Roth IRA is a retirement account that allows you to contribute after-tax dollars. The reason retirement savers choose a Roth IRA over a Traditional IRA is summed up pretty easily come retirement. No taxes. Since your funds are taxed before they’re contributed, they’re not taxed again come retirement, unlike a Traditional IRA. There is a myriad of reasons why this account type might be for you, so here’s our argument for opening one in 2018.
The main benefit of a Roth IRA is that your investments grow tax-free. However, you do need to meet a few conditions to receive the investment growth income tax-free. First, you need to have had a Roth IRA in existence for at least five years. Second, for a tax-free and penalty-free distribution of investment gains, one of the following conditions needs to be met: reach age 59.5, death, disability, or $10,000 of qualified first-time home-buying expenses.
Access to Funds
While tax-free growth is fantastic, there are additional benefits of a Roth IRA. One of these benefits is the easy access you have to your own contributions to the IRA. For instance, if you put $5,000 dollars into a Roth IRA, invest it in stocks, and the value grows to $10,000, you can still withdraw your initial investment of $5,000 at any time without paying income taxes or penalties. This is because Roth IRA withdrawals allow you to withdraw your contributions first before having to tap into any of the investment gains. This is a great feature that does not exist with a 401K or traditional IRA because withdrawals of contributions to deductible accounts typically generate income taxes owed and a penalty tax of 10 percent if the withdrawal takes place before age 59.5. This Roth IRA feature gives people more access to their own money, more liquidity, and more flexibility.
Lower Taxes in Retirement
Roth IRAs also offer great tax savings in retirement. Because Roth IRA withdrawals of both contributions and investment gains are income tax-free when taken in retirement, they do not increase a retiree’s tax liability, tax rate, Medicare premiums, or Social Security taxes. The tax-free nature of Roth IRAs can be very beneficial.
Another benefit of a Roth IRA is that the account balance is not subjected to required minimum distributions after the owner of the account reaches age 70.5. Most other retirement accounts, like the 401K and traditional IRAs, are subject to required minimum distributions. A Roth IRA means that seniors have more control over when they spend their money and are not forced to take withdrawals. This also allows the money to remain invested and to continue to grow in a tax-free vehicle for a longer period of time.