More than 60 million taxpayers in the US hold an individual retirement account (IRA). High-income taxpayers are more likely to have an account, but they’re a good investment vehicle.
If you’re planning for your retirement, you might be asking, what are the benefits of a Roth IRA. Here are some ways this individual retirement account can save you money.
Roth IRA vs. IRA
A traditional IRA is a retirement savings plan that gives you a tax advantage in the year that you contribute. Your savings grow, which defers your taxes until you withdraw the money. You can deduct your contribution amount from your income when preparing your taxes.
The retirement age under tax law is age 59 1/2 for both types of IRAs. When you withdraw money from a traditional IRA after retirement, the amount is taxable income in that year. If you’re wondering what is a Roth IRA, it might be helpful to ask a financial manager.
A Roth IRA doesn’t provide a tax advantage in the contribution year. Your savings grow in the plan tax-free, and your withdrawals are tax-free in retirement.
Additional rules for both types of plans might allow early withdrawals without penalty. Some of the factors include the planned use of the funds and how long you have held the IRA. It’s essential to consult a professional to help you optimize your tax planning in these situations.
What Are the Benefits of a Roth IRA?
One of the leading tax benefits of Roth IRA accounts is taking out your money in the future without paying taxes. Your earnings grow inside the plan, and you won’t pay tax when you withdraw them at retirement.
It’s a great way to invest, and you save on future income taxes. Other advantages of a Roth IRA are as follows:
Avoid Required Minimum Distributions (RMDs)
One of the main benefits of a Roth IRA is your ability to keep your money growing tax-free in your account for as long as you want. When you hold savings in a Roth IRA, you aren’t required to withdraw specified amounts each year. With traditional IRAs, you have to calculate and withdraw the RMD amount each year as taxable income after reaching a certain age.
Estate Planning Flexibility
If you inherit a Roth IRA, distributions are tax-free in most cases. You will be required to take out minimum distributions (RMD) from the plan. Get professional advice if you’re planning to use a Roth IRA as part of your estate planning.
Easier Access to Your Money
With a Roth IRA, you can withdraw your money before retirement, and you won’t pay tax as long as your account is more than five years old.
If your account is less than five years old and you need the money, you can avoid penalties, but your earnings may be taxed. There are some exceptions, depending on your planned use of the funds.
- an amount to buy your first home up to a limit
- qualified educational expenses
- specific medical or health insurance payments if you aren’t employed
- qualified birth or adoption costs
- ask a professional for additional exceptions.
Income Flexibility During Retirement
If you have a Roth IRA and a traditional IRA, you can use them to limit the tax you pay each year after you retire. You pay tax at a lower rate when you draw income from your traditional IRA up to the first tax bracket. Then you can withdraw any additional funds you need from your Roth IRA, enjoying its tax-free status.
A Roth IRA is an excellent option if you think your tax bracket or tax rate in retirement will be higher than it is during your contribution years. These retirement accounts are a great option for young people as they tend to earn less income when they begin working.
If you invest early, you have more time for your investments to grow. A younger person pays tax at lower marginal rates in their contribution years. When they reach retirement age, they’ll benefit from the Roth IRA tax-free status if they expect a higher taxable income.
Roth IRA income rules prevent individuals from making contributions if they earn over a certain amount. That provides another advantage to lower or middle-income earners. They’ll benefit from the ability to make contributions to their accounts which is another excellent reason to begin investing early.
You Can Change Employers
The Roth IRA is a personal retirement account, and it’s not tied to a specific employer. You can open your account and contribute to your retirement savings according to your own schedule.
If your employer changes, you don’t need to roll your plan over into a new one. You also don’t need to keep track of several plans from old employers.
More Investment and Funding Options
Your employer’s plan administrator controls a traditional IRA and determines your investment options. When you have a Roth IRA, you manage your investments and have a broader range of options to select from. It’s a great way to plan retirement for investors who want more say in their holdings.
You can fund your Roth IRA in a variety of ways. You can make regular contributions to an individual plan or make spousal contributions. That’s when a working spouse makes contributions to a non-working spouse.
The non-working spouse has no employment income, which is usually a requirement for a Roth IRA contribution. The spousal contribution is an exception to the rule. You can make transfers from one Roth IRA to another if you follow the rules.
Rollover contributions and conversions are two other ways to fund your Roth IRA. These transactions are complex, and your actions may attract penalties or taxes. Always consult a specialist before you proceed.
Discover Retirement Management Solutions
Understanding what are the benefits of a Roth IRA is the first step toward creating a retirement plan. Our goal is to preserve and maximize your wealth with your future needs in mind.
Contact Bogart Wealth today for wealth management services in the McClean, VA and Greater Houston, TX area. We can help you achieve financial peace of mind into your retirement.