One of the most exciting retirement tools is the Roth IRA. Investors can build wealth in these accounts with special tax advantages. And, thanks to the ability to convert other retirement accounts to a Roth IRA, virtually anyone can take advantage of a Roth account. Here are five reasons to include a Roth IRA in your retirement planning:
1. Earnings grow tax-free. You can't take a tax deduction for contributions to a Roth IRA. However, since you are making your contributions with after-tax dollars, your earnings grow tax-free. And you won't have to pay taxes on your withdrawals. If you think that taxes will be higher when you retire, it can make sense to pay them now, and let your money grow tax-free in a Roth IRA. (If you are rolling money over from a traditional account, you will need to pay taxes on the amount you move.)
2. No required minimum distributions. When you reach age 70 1/2, you have to begin taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s. With a Roth IRA, there is no requirement to take distributions. If you aren't ready to withdraw from your Roth IRA, you won't be forced to take distributions that could lead to higher tax payments.
3. You can withdraw contributions any time. You can withdraw the contributions you make to a Roth IRA at any time, and for any reason. While you can't withdraw the earnings without the possibility of incurring taxes and penalties, you can withdraw what you put into the account at any time, no questions asked. It's important to understand, though, that withdrawing your contributions can be problematic when it comes to efficiently building wealth. If you withdraw that capital it's no longer earning interest on your behalf.
4. You can keep contributing indefinitely. With a traditional IRA, once you reach age 70 1/2, you can no longer contribute. However, as long as you have earned income, you can keep contributing to a Roth IRA at any age. So you can keep building up your nest egg as long as you would like to. However, there are income requirements for contributing to a Roth IRA. But many people get around those by contributing to a traditional IRA, and then rolling the money over to a Roth. Just make sure you understand the tax implications of a Roth IRA conversion.
5. Use earnings to buy your first house. If your account has been open for at least five years, you can access the earnings from your Roth IRA to help buy your first house. You can withdraw up to $10,000 penalty-free and tax-free in order to contribute to your home's down payment. While this can be advantageous, it's important to remember that you can't recoup the lost ability to earn interest when you withdraw your principal and earnings from a Roth IRA.
Overall, a Roth IRA is a great retirement vehicle. You can choose from a number of investments that will grow tax-free in the account. A Roth IRA also gives you a great deal of flexibility that you don't have in other tax-advantaged retirement accounts.
Jeff Rose is a certified financial planner and U.S. combat veteran. He blogs at Good Financial Cents and Soldier of Finance.
- Roth IRA