There are few options for investment available that are quite as well-loved as the Roth IRA. This is true for both young people and those who are approaching retirement, as Roth IRAs come along with numerous advantages when compared to traditional individual retirement accounts. Many people have been told at point or another they should consider a Roth IRA, yet don’t know exactly how they can benefit from one. Once you learn more about the finer points, however, it becomes clear that a Roth IRA is one of the best vehicles for saving for retirement out there.
On the fence? Here are four key benefits of setting up a Roth IRA.
1. Tax-free Income Throughout Retirement
One of the primary reasons to consider a Roth IRA is the fact that it provides a stream of tax-free income throughout retirement. Sure, income tax is paid up-front on contributions, but all of the compounded interest that comes from storing money in a Roth IRA is protected from taxation. Traditional IRAs provide tax deductions for the year in which a contribution is made, while Roth IRAs allow you to contribute after-tax money prior to retirement so as to take advantage of tax-free earnings later on. It’s the best tool for producing tax-free income once you’ve reached retirement age.
2. No Age Requirements (Minimum or Maximum)
There’s a downside to traditional IRAs that many people don’t realize until it’s too late, in that contributions must stop once one reaches the age of 70 and ½—this mandate does not apply to Roth IRAs. Whether you’re 15 or 100, earned income can be contributed to a Roth IRA without being subject to age restrictions. This truly makes a case for both young people and those who are 70+, as it allows for years of tax-free growth and compounding.
3. No Minimum Required Distributions (MRDs)
A key thing to understand about traditional IRAs—as well as most 401(k)s and 403(b)s—is that minimum required distributions (MRDs) need to be taken annually once one reaches a certain age. These can not only result in taxable income, but they can also become a nuisance for those who don’t require distributions to cover essentials. An additional benefit to Roth IRAs is that MRDs are eliminated, which makes it easier to pass along tax-free money to heirs and takes an unnecessary extra step out of the retirement process.
4. Your Money is Available if You Need It
The goal with setting up a Roth IRA certainly shouldn’t be to pull from it prematurely, but circumstances can pop up where having access to your money becomes critical. Most retirement plans do have provisions that allow you to make withdrawals under financial hardship and in other situations, though with a Roth IRA, withdrawals can be made at any time and for any reason. Note that investment gains are not usually available for early withdrawal, so if you’ve invested $40,000 over a period of time, this is the amount that can be pulled from the account. For this reason, a Roth IRA can serve as both a retirement account and emergency fund at once.
It’s never too late to set up a Roth IRA, and the benefits of doing so can really show themselves during retirement. With the help of a trusted financial advisor, a Roth IRA can do wonders for your financial future.