An IRA is known as an individual retirement account. It is a form of “individual retirement plan”, that is provided by many financial institutions, that provides tax advantages for retirement savings in the United States today.
A Roth IRA is a type of Individual Retirement Account (IRA) to which you make contributions with after-tax dollars. It is perceived that the benefits of a Roth IRA are that your contributions can grow tax-free and you can generally make withdrawals tax- and penalty-free after you reach age 59½.
Asides the other types of distinct Individual retirement accounts and retirement accounts – such as 401(k), SEP IRA, SIMPLE IRA, Rollover IRA, and a whole lot more; there are certain things that make a Roth IRA stand out. As said, the basic advantage lies in its very definition, because while using a Roth IRA, contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. One thing to note is that not everyone can contribute to a Roth IRA, because of IRS-imposed income limits. Regardless, here are some of the benefits and general reasons why you actually need to get a Roth IRA.
There are numerous tax advantages of using a Roth IRA. The first great one is that you get to enjoy tax free growth. Since earnings are not subject to income tax, as long as you have held the account for at least 5 years and you are at least 59 ½, you enjoy unbridled growth with no tax deductions whatsoever. Basically, unlike the traditional IRA that gives investors a tax deduction for the year the contribution is made, using Roth IRA will allow savers contribute after-tax money today and in order to withdraw principal and earnings tax-free at retirement. How is that for benefits? Even better is the fact that withdrawals from Roth IRAs are federal income tax free and penalty free if a five-year “aging” period has been met. If you do not have a Roth IRA, here is a good reason to leave the others and join – if you qualify for it of course.
When compared to the Traditional IRA and all the others, a Roth IRA is entirely flexible. When it comes to flexibility, you can withdraw your contributions at any time without taxes or penalties. Meaning you can get free cash at any time you want. Of course, for you to take out more than just the contributions, you must be at least 59 1/2 years old and the account must have been opened for at least 5 years. Roth IRAs may even enable you to better manage your overall income tax liability in retirement. There are some qualified withdrawals if you do not meet the age or holding period requirement. However, you can beat all these with certain reasons. You can enjoy first-time home purchase up to $10,000, and if you are faced with circumstances such as Permanent disability, or paying health insurance premiums while unemployed; you enjoy it too. A Roth IRA is generally the most flexible of all of them.
You can leave tax-free money to heirs
This is another great reason why you should get yourself a Roth IRA today. Where you have people that you intend to take care of even after you are gone, a Roth IRA is your best bet. Basically, Roth IRA’s have legacy and estate planning benefits as your assets can be passed onto beneficiaries after death. In other words, it not only allows your money to grow tax-free for your entire life, but also let you leave tax-free income to your heirs. Note that your heirs will be subject to minimum distributions based on their age beginning in the year after your death and unlike the original account holder, the inheritor cannot let money in an inherited Roth IRA compound tax-free indefinitely. There are certain other requirements that need to be fulfilled to enjoy this but it is still the best way to save for future generations of yours to come.
You can contribute more even when you are older
Since 2010, Retirement savers can contribute up to $5,000 to an IRA or $6,000 if they are age 50 or over. The even greater part of this is that you can still contribute after age 70 ½. With the usual traditional IRA, all investors must stop making contributions when they turn 70 ½ years old, at which point they are forced to take distributions and begin paying taxes on that money. However, with a nice Roth IRA, there is no required minimum distributions. You can make contributions to a Roth if you continue to work in retirement as long as you stay within the income limits. This also applies to minors with income. You are not too young to contribute to a Roth IRA. So, if you are 16 with a good source of income, you can contribute to a Roth IRA as well. You also get to enjoy many years of tax-free growth.
You enjoy even other great benefits!
Asides the specific benefits already listed, there are other smaller benefits that you stand to enjoy with a Roth IRA. Some of these are:
- The IRS have removed the $100,000 income limit this year, which previously did not allow many high-income taxpayers to convert traditional IRAs to Roth IRAs, so high earners can now contribute as well
- Traditional IRA and 401(k) account balances can also be converted to Roth accounts if you pay income tax on the amount converted
- With Roth IRAs, all the savers get a tax-free stream of income even in retirement and not just through the contribution period
- A Roth IRA may, to a good extent, help limit your exposure to the Medicare surtax on net investment income
- A Roth IRA may help you hedge against future tax hikes
There reasons and more are some of the reasons Roth IRA is the most preferable in the United States. It has its disadvantages too, but its advantages far outweigh them. You should get a Roth IRA now and secure your future.