The Advantages of a Roth IRA

The Advantages of a Roth IRA

Have you been hearing about Roth IRAs and would like to know a little more? Are you curious about whether you’re investing your money wisely? Maybe you’re just tired of investing with the knowledge that you’ll pay taxes through the nose when you finally retire someday.

Roth IRAs may be your best bet, if you fall under a certain income bracket or are working with your advisor to convert traditional retirement accounts to a ROTH IRA, your income level and amount of conversion available is currently UNLIMITED under current law! These requirements can change year-to-year, and may also be affected by your age group, so check with your financial advisor about the latest laws.

Consider these benefits:

• Roth IRAs have some significant advantages over most other investment and retirement instruments.

• They offer 100% tax-free profits, tax-free withdrawals and reduced estate taxes AND THESE WITHDRAWALS DO NOT CREATE TAXES ON YOUR SOCIAL SECURITY BENEFITS, just to name a few.

Roth IRA vs. Traditional IRA

Roth IRAs are different from Traditional IRAs in that the contributions you put in the IRA are not tax deductible. But Roth IRAs do not require you to start taking money out at a certain age, and all capital gains are yours to keep.

Because you use after-tax money to make your contributions, you don’t get a tax deduction like you would with a traditional IRA. You can even take a portion of your money out early without any penalty or tax ramifications.

Let’s look at some of the advantages a Roth has to offer; you might just run out and open one today!

1. True tax-free wealth accumulation. All the money you make in your Roth IRA is yours to keep. The taxman can’t touch it as long as you don’t withdraw your profits before retirement. This makes a huge difference over time.

  • Using after-tax money might hurt a little more when you’re making the contributions, but it’s a lot better than paying taxes on all the capital gains in your account when you start getting your money back out! Most would consider this to be the greatest advantage of a Roth IRA.

2. There are no mandatory withdrawal dates. You can keep the money in the account for as long as you like, unlike Traditional IRAs. This provides a greater length of time for your money to grow.

  • Traditional IRAs require the owner to begin withdrawing funds by a certain age. And remember, those profits you made in a Traditional IRA are going to be taxed (and many people believe tax rates will be higher in the future and have historically been as high as 94% here in the United States).
  • The added timing flexibility can really make a difference. This is particularly true if you’re in good health and likely to live for a long time. With a Traditional IRA, you might run out of money if your longevity is significant.

3. Estate tax reduction. Anything left in your Roth IRA will pass to your heirs tax-free. This is not true for a Traditional IRA. Knowing your spouse, children, or other heirs will get all the funds in your account can certainly be reassuring!

4. Early withdrawals aren’t taxed. Since the money you put in the account was after-tax, you can withdraw those funds without a penalty or tax. You can only withdraw what you put in, though, so you won’t be able to withdraw the profits early without a penalty before age 59 1/2 and five years have passed since contributing the funds being withdrawn.

  • Some special exceptions are available to use the funds to purchase a home.
  • This increased flexibility can be advantageous when life’s challenges find their way to you. But just like with any other investment, don’t be tempted to withdraw the money if you don’t really need it!

The Roth IRA has been around for several years now, but not everyone is familiar with the advantages it has to offer. The contributions sting a little more, since you won’t be able to take a tax deduction. But for most of us, that’s a small price for having tax-free capital gains and the great flexibility offered with a Roth.

Overall, a Roth IRA is an excellent investment and retirement vehicle for most people and situations. Contact your financial advisor today to see if you’re eligible to contribute to a Roth IRA, or if it makes sense to convert any of your traditional retirement accounts to a Roth Ira. This kind of investment and these types of decisions can really help get your retirement funding on track! Your advisor should be able to help you reduce your retirement tax burden and help you understand why this approach, in combination with other strategies, can make a meaningful impact on the success of your retirement plans.

If you want to see if a Roth IRA is suitable for YOU, please message us or contact our office for a FREE consultation.