What Are the Benefits of a Roth IRA? Check It Out

More than 60 million taxpayers in the US hold an individual retirement account (IRA). High-income taxpayers are more likely to have an IRA account, but they’re a good investment vehicle for just about anyone.

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. 

A Roth IRA doesn’t provide a tax advantage in the contribution year. However, your savings grow in the plan tax-free, and your withdrawals are tax-free in retirement. So, if you plan to wait until you retire to withdraw funds from your retirement account, a Roth IRA will yield a greater financial reward.

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 greatest benefits of investing in a Roth IRA is the potential for tax-free growth over time.

Roth IRAs are funded with after-tax dollars, so withdrawals are typically tax-free as long as certain conditions are met. By doing this, you can accumulate more assets over time that would have otherwise been lost to taxes if it had been held in a different account.

This can be especially advantageous for people who expect to pay higher taxes when they enter retirement since the Roth IRA offers universal tax advantages. Additionally, Roth IRAs offer flexibility in that investors can withdraw money from any source – including their own investments – tax free and penalty free.

As Warren Buffett has famously said, “Time is the friend of the investor.” Investing in a Roth IRA puts time on your side, allowing investors to plan for future growth and weather storms if needed.

Here are some other benefits of a Roth IRA:

1. 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.

2. Estate Planning Flexibility

If you inherit a Roth IRA, distributions are tax-free in most cases. You might still be required to take out minimum distributions (RMD) from the plan upon inheritance, however. If you want to yield the greatest benefits of a Roth IRA, we recommend getting professional advice on your estate planning.

3. 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.

4. 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 reap the benefits of a 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.

5. 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. 

6. 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 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 in your retirement. 

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
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