Reasons to consider a Roth IRA
Do you want to help lower your taxes in retirement and increase your retirement savings? A Roth IRA, with it’s tax-free growth potential and tax-free withdrawals for you and your heirs will help you accomplish that as long as the requirements are met.
1. Money can grow tax-free and withdrawals are tax-free too
You can contribute money that has already been taxed to a Roth IRA. There isn’t a tax deduction as there can be with a traditional IRA. Any growth or earnings from the investments in the account, and any distributions you take out in retirement are free from federal taxes (may also be free from state/local taxes too) with a few conditions.
2. There are no required minimum distributions
Roth IRAs don’t have required minimum distributions for the original owner. Traditional IRAs and 403(b)s, Roth and traditional 401(k)s, and other employer-sponsored retirement savings plans do. If you don’t need your distributions for expenses that you need, RMDs can be hard to keep track of. The RMDs must be calculated and withdrawn each year, and may result in a taxable income. Since a Roth IRA eliminates the need to take RMDs, it may also enable you to pass on more of your retirement savings to your heirs.
3. Leave tax-free money to heirs
In a lot of cases, a Roth IRA has a legacy and estate planning benefits, but you have to consider the pros and cons which can be confusing. Make sure you consult an attorney before trying to use Roth IRAs as a part of an estate plan. While RMDs are required for inherited Roth IRAs, as they are for inherited traditional IRAs, distributions from inherited Roth IRAs are usually tax-free.
4. Tax flexibility in retirement
You’ve already paid the taxes on the contributions to a Roth IRA, as long as you follow the rules, you will be able to take out your money tax-free. Mixing how you take withdrawals between your traditional IRAs and 401(k)s, or other qualified accounts, and Roth IRAs may enable you to manage your overall income tax liability in retirement better. For example, you could take withdrawals from a traditional IRA until your taxable income reaches the top of the tax bracket, and then take additional money you need from a Roth IRA.
5. Help reduce or even avoid the Medicare surtax
A Roth IRA may help limit your exposure to the Medicare surtax on net investment income. This happens because qualified withdrawals from a Roth IRA don’t go count the modified adjusted gross income threshold that determines the surtax. RMDs from traditional accounts, like a traditional 401(k) or traditional IRA, are included in a MAGI and do count toward the MAGI threshold for the surtax. Depending on your income while you’re in retirement, RMDs could expose you to Medicare surtax, using Roth accounts can help you avoid it.
6. Hedge against future tax hikes
There’s no way to know if tax rates will rise in the future for certain, but the top federal income tax rate remains far below its historical highs, if you think it might go up again, a Roth IRA could make sense for you.
7. Use for your contributions at any time
A Roth IRA lets you take out 100% of what you have contributed at any time and for any reason, with no penalties or taxes. Only earnings and converted balances in the Roth IRA are subject to restrictions on withdrawals. Usually, withdrawals from a Roth IRA are considered to come from contributions first. Distributions from converted balances and earnings, which can be taxable and/or subject to penalties if the requirements aren’t met — begin only when all contributions have been withdrawn.
8. If you’re old, you can continue to contribute as long as you work
As long as you have received compensation, whether it is a regular paycheck or a 1099 income for contract work, you can contribute to a Roth IRA– no matter your age. There isn’t an age requirement for contributions, but you must be within the income limits in order to contribute to a Roth IRA.
9. If you’re young, your income will probably rise
Generally speaking, the younger you are, the greater the chance that your income will increase when you retire than it is now. For example, if you’re under the age of 30, it’s possible that your income and spending during retirement will be higher than they are now, which is the beginning of your career. And the greater the difference between your income now and in retirement, the more advantageous a Roth account can be.
If you earn too much to contribute
In order to contribute to a Roth IRA, you must have employment compensation, but there are also income limits. If your income is over the IRS limits, the only way you can take advantage of a Roth IRA is by converting money from an existing retirement account. There is a cost. You’ll generally need to pay taxes on what you convert, but any after-tax contributions to a traditional account will not be taxable. The rules are confusing, so if you have made after-tax contributions to a traditional account and you’re interested in conversion be sure to consult with a tax advisor.