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 provide the investment flexibility to help you achieve both retirement goals and other financial goals.
Here’s more on why a Roth should be part of your retirement investment mix:
1. You get tax-free growth and withdrawal
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.
There are two rules you must follow to ensure that all the money you withdraw comes out tax-free. For starters, you must be at least age 59½ when you make your withdrawal. Also, the first withdrawal cannot occur until five years after you have made your initial Roth IRA contributions.
2. You can withdraw contributions at any time
The waiting period we describe in point No. 1 applies to your Roth IRA earnings — that is, the investment gains on your contributions. However, the money you contribute to a Roth IRA can be removed at any time for any reason without paying a penalty.
Although it’s not a great long-term investment strategy, you always can access the money you’ve contributed. Because of this fact, some investors use a Roth IRA as an emergency savings fund, 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.
But to state it again, the earnings within your Roth are another story: The five-year aging rule and minimum retirement age rules apply to withdrawals that include earnings.
3. You can 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. You can 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 who are not spouses. 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. You get added tax flexibility
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.
Shifting political realities have some wondering if their tax rates are likely to be higher 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 2016, the upper income limit for single filers to make a full contribution is $117,000. As income increases, the amount that can be contributed diminishes and goes to zero at an income of $132,000. For couples who file jointly, the income limit is $184,000 for a full contribution, with an upper limit of $194,000 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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