If you’ve been considering a Roth IRA as part of your retirement investment portfolio, now’s the time to start one.
With tax-free growth and tax-free withdrawal opportunities, Roth IRAs can offer strategic benefits throughout retirement and provide the investment flexibility to help you achieve other financial goals along the way.
Here’s more on why a Roth should be part of your retirement investment mix:
1. Grow tax-free and withdraw tax-free
Unlike a traditional IRA, contributions to a Roth are made using money that’s already been taxed. While there’s no tax benefit up front, your earnings within the account grow tax-free and withdrawals made during retirement are also tax-free.
Once a five-year aging period has been met (generally speaking, this means the first withdrawal occurs no sooner than five years after the original contribution was made) and the account owner is at least age 59½, the money you take out of your Roth IRA is tax-free.
2. Withdraw contributions at any time
The money you contribute to a Roth IRA can be removed at any time for any reason. Though it’s not a great long-term investment strategy, you always have access to the money you’ve put in without penalty. But the earnings within your Roth are another story: The five-year aging rule and minimum retirement age rules apply to withdrawals that include earnings.
Some investors use the liberal withdrawal rules of a Roth IRA to build emergency savings, knowing that as long as their contributions are invested in a money market or cash-equivalent account, the funds are easily accessible and available penalty-free.
3. Contribute as long as you’re working, regardless of age
You can keep adding to your Roth IRA well into retirement. No matter your age, if you earn a paycheck or receive 1099 wages for contract work, you can still contribute to your Roth. By contrast, with a traditional IRA contributions must stop when an earner reaches age 70½.
4. Avoid required minimum distributions
Unlike a 401(k), 403(b), or traditional IRA, Roth IRAs don’t mandate minimum distributions during the lifetime of the original owner. That can be a big relief for those who don’t need additional income in retirement or for those who’d rather have a Roth to bequeath as part of their estate.
Minimum distributions do apply to heirs. If you’re considering making your Roth IRA a significant part of your estate, consult an attorney or investment adviser for details on how a Roth inheritance might affect your survivors’ taxes.
5. Balance your future tax liability
The biggest and best benefit of a Roth IRA is hidden in plain sight — namely, the ability to choose whether you take your income in retirement tax-free or taxed.
It used to be said that a regular IRA or 401(k) was wisest because your income tax rate was likely to be lower after retirement. It made sense to save pretax and then pay taxes on that income when you withdrew it later in life. But shifting political realities have some wondering if we could actually face higher tax rates in retirement.
Many folks are betting that it’s smarter to pay the taxes now instead of kicking the can down the road and risking higher rates later. Regardless, having at least a portion of your retirement in a Roth IRA offers the option of managing your tax liability by diversifying your sources of income.
It’s important to note that not everyone qualifies to invest in a Roth IRA, and for those who do, there are annual contribution limits. For 2015, the upper income limit for single filers to make a full contribution is $116,000. As income increases, the amount that can be contributed diminishes, and goes to zero at an income of $131,000. For couples who file jointly, the income limit is $183,000 for a full contribution, with an upper limit of $193,000 for a partial one.
If you exceed those income limits, you can’t contribute new money to a Roth IRA, but you are allowed to convert money from an existing traditional IRA or other qualified plan to a Roth.
For those who can contribute the maximum to a Roth, that amount is $5,500 ($6,500 if you’re age 50 or older).
To learn more about Roth IRAs, check out the IRS’s complete guide here. And remember, the sooner you make a Roth part of your retirement planning, the longer that tax-free balance can grow. Get started today!
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