10 Reasons We Love Roth IRAs (And You Should Too)
Estimated reading time: 3.5 minutes
Most people know what a Traditional IRA is, yet many who are familiar with the concept of IRAs still aren’t aware of the Roth IRA. According to the Investment Company Institute, 69 percent of IRA holders in 2016 had Traditional IRAs, while only 34 percent of IRA holders had a Roth IRA.
The Traditional IRA was introduced in 1974, so it’s had over double the time the Roth (established in 1997) has had for Americans to familiarize themselves with it.
Regardless, it’s a shame that so few people are aware of the Roth—it’s fantastic.
Here are 10 reasons we think you should check out the Roth IRA:
1) You’ll Never Age Out
As long as you have earned income, you can make contributions to a Roth. You don’t age out like you would with a Traditional IRA, which won’t allow you to make contributions after age 70½ (just make sure your income doesn’t exceed the compensation limit).
2) No Required Minimum Distributions
Traditional IRAs require you to take annual distributions starting at age 70½; the Roth does not. A Roth allows you to take tax-free distributions at your own behest once you’ve met the requirements.
3) Delayed Gratification for the Win
A Roth IRA requires you to pay your taxes upfront. Choosing not to defer taxes on contributions ensures fewer surprises later on, and allows you to plan better for the future. By following the Roth distribution rules, your earnings will be distributed tax-free. You’ll never be blindsided by chunks of your distribution being reallocated to pay taxes.
4) No Penalties for Withdrawal
You already paid the taxes on the money you contributed to your Roth, so there’s no penalty if you withdraw your contributions. The same is not necessarily true for converted amounts and account earnings though (more on that later).
5) It’s Great in a Pinch
The funds in your IRA should really be left alone to grow, and be there when you need them during retirement, but… Remember those penalty-free withdrawals? Should an emergency arise, your contributions are an option for backup funds if you need them.
Furthermore, if your circumstances qualify for a penalty exemption, you’re allowed to withdraw more than just contributions. If you have not satisfied the Qualified Distribution criteria, your earnings may still be distributed penalty-free for expenses such as:
- Paying for post-secondary education
- Total and permanent disability
- Building, or buying, your first home (up to $10,000 distribution)
- Medical insurance premiums during unemployment (COBRA payments)
- And a few additional exceptions
6) Tax-Deferred to Tax-Free In Just Five Years
As mentioned above, your contributions can be withdrawn without penalties or additional taxes from your Roth IRA because you paid them up front, but the same isn’t necessarily true of your Roth’s earnings. However, it takes only five years after you open your Roth for even the earnings to be distributed tax-free provided that you are also at least 59 ½ years old, disabled, or deceased. Up to $10,000 of the earnings may also be tax-free if used for your first home purchase.
7) Legacy Building
You’re allowed to name single or multiple beneficiaries to every Roth IRA you hold. If/when your beneficiary inherits the IRA, its funds will be distributed to them tax-free, provided the IRA was opened at least five years prior.
8) There’s a Back Door
Given the income limits we linked to earlier you may be thinking the Roth isn’t for you, but you can bypass those—it’s just a little extra paperwork. A backdoor Roth IRA (strictly an industry term) consists of opening a Traditional IRA, contributing to it, and immediately converting it to a Roth. Note, however, that there may be taxes associated with the conversion. Yes, it’s that easy.
9) You Can Hang onto Your Real Estate
One of the perks of not having required minimum distributions is not having to liquidate assets to create said distributions. If your IRA owns a house and you want to hang onto it even after you reach retirement age, you can. You can even distribute the house tax-free eventually if you choose to live in it.
10) Lacking Tax Liability
Your money has already been taxed, so once you retire and withdraw the money, it doesn’t affect your tax liability at all. It won’t affect benefits such as social security either since any Qualified Distributions are tax-free.
Intrigued? Check out our Self-Directed Roth IRA page to learn more.