A Roth IRA is a type of retirement account with already taxed funds. Any money funneled into a Roth IRA account is after-tax money. As a result, Roth accounts offer tax-free growth and (qualified) tax-free withdrawals during retirement. To learn more, read on to discover seven key benefits of a Roth IRA.
1. Tax-Free Growth
One of the most significant benefits of a Roth IRA is tax-free growth. This means that all the money you’re investing in your Roth IRA can grow without the hindrance of taxation since taxes have already been deducted from the amount invested. This differs from deferral investment accounts, which are subject to yearly state, federal, and local taxes. As a result, your money makes money, untouched by anyone other than you, and you don’t have to worry about reporting any investment earnings.
2. Tax-Free Withdrawals
After you meet the withdrawal requirements, you can withdraw money from your Roth IRA, which includes your contributions plus earnings, without paying any taxes or penalties. To do this, you must meet the following criteria:
- Be at least 59 years of age
- Have owned your account for a minimum of five years
For many individuals, this can be a significant perk.
3. You Withdraw on Your Terms
Traditional IRA accounts have required minimum distributions. Roth IRAs, on the other hand, don’t. After you meet the withdrawal requirements with a Roth IRA, you’re eligible for penalty-free and tax-free early withdrawals on your contributions anytime. Because the money is taxed before contributing, there is no additional tax deduction.
However, there are income limits for contributing to a ROTH IRA. Note that if you’re under unqualified and you make a withdrawal on earnings from your contributions, you may be subject to withdrawal penalties and taxes on the earnings amount.
4. You Likely Qualify for Tax Credits
Individuals who make eligible contributions to employer-sponsored Roth IRA accounts may qualify for the Saver’s Credit or Retirement Savings Contribution Credit. Your eligibility will depend on factors such as your gross income and the amount you’ve contributed to your Roth IRA.
5. Tax-Free Beneficiaries
When you get a Roth IRA account, you select beneficiaries or people who stand to inherit your Roth IRA and its earnings in the event of your death. Roth IRA beneficiaries must take required minimum distributions, but they won’t be required to pay federal income tax on the withdrawals if the Roth has been open for at least five years. Because Roth IRAs allow you to create a tax-free inheritance option for your loved ones, these plans can significantly benefit estate planning.
6. You Can Invest in Multiple Accounts at Once
Another benefit of a Roth IRA account is that you can have one while simultaneously keeping your other retirement accounts. That way, you aren’t caught in a dilemma of whether you should move forward with one retirement account or another. For instance, you could enroll in your company’s employer-matched 401(k) plan and have a personal Roth IRA account on the side. Of course, this is only an option if you can contribute to both, as there are contribution and income limits. But combining these plans may set you up for greater retirement stability.
7. Lots of Investment Options
Roth IRAs offer many investment options, from mutual funds to exchange-traded funds. With a Roth IRA account, you can invest in individual stocks, funds, and bonds from other companies.
Get Started with a Roth IRA Account
To find out whether you qualify for a Roth IRA and learn more about how to get started, contact Good Life Financial Advisors of Mt. Pleasant to speak with a member of our experienced team. Our process begins with a free call where you can discover more about our services and how they might benefit your financial situation.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical is no guarantee of future results.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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 ½ or prior to the account being open for 5 years, whichever is later, may result in 10% IRS penalty tax. Limitations and restrictions apply.