MORE LIKE THISInvestingRetirement PlanningRoth and Traditional IRAs
There are retirement accounts, and then there's the Roth IRA. It's a pretty sweet way to grow your retirement investment tax-free, and get tax-free withdrawals in retirement.
Below are five of the most notable advantages the Roth IRA offers over other retirement accounts.
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1. Tax-free retirement income
The most obvious difference between a traditional IRA and the Roth is how each account deals with taxes. A traditional IRA offers an upfront tax break: Contributions may be deductible in the year they are made to the account. When you pull money out of a traditional IRA in retirement, you owe income taxes.
With the Roth, you have to wait longer for the tax-savings payoff. But it’s worth it, especially for those who predict their tax rate will be higher later than it is now. Also, keep inflation in mind. Money loses value over time, and taxes will probably be higher when you retire than they are now.
If you take care of your tax tab upfront — funding the account with post-tax dollars (remember, Roth contributions are not deductible) — as far as the IRS is concerned, its business with you is complete. When you start making withdrawals in retirement you owe nothing — not even for the earnings on your investments. The money is yours, free and clear.
2. Penalty-free withdrawals
Ideally, the money you put away for retirement remains squirreled away and untapped until retirement. But at those times when you really need the money, the Roth makes early withdrawals much easier than the traditional IRA.
If you take an early withdrawal from a traditional IRA before age 59 ½, you'll likely face both an income-tax bill and a 10% early withdrawal penalty. (There are some exceptions; read more about traditional IRA withdrawals.)
You can dodge both the taxes and the penalty with a Roth as long as the money you withdraw comes from your contributions and not earnings. This makes it a more reasonable choice when your emergency fund needs access to its own emergency fund. (Be sure to follow Roth IRA withdrawal rules to avoid triggering a taxable event.)
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3. No required minimum distributions
Money in a traditional IRA is subject to RMDs, or required minimum distributions, which means savers are required to start withdrawing from their accounts at age 73. Forget to cash the check, and the IRS could hit you with a penalty tax on the amount you didn’t withdraw.
The Roth, on the other hand, is RMD-free: Original account holders are free to let all of their money stay put for as long as they're alive, which means:
Investments can continue to grow tax-free in the account.
Investors can avoid selling assets at a bad time. In a traditional IRA, forced withdrawals mean cashing out investments regardless of market conditions. In a down market year, that could mean selling at a loss.
4. Tax-free withdrawals for your heirs
Unlike money left via a traditional IRA or other retirement accounts, such as a 401(k), where the requirement to pay taxes on withdrawals passes down to heirs, contributions from an inherited Roth IRA can be withdrawn tax-free at any time. Earnings from an inherited Roth can also be withdrawn tax-free, as long as the account had been open for at least five years at the time the account holder died.
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5. Almost anyone can contribute to one
The previous four benefits may have persuaded you to open a Roth IRA (here’s how and where to open one), but your plans may be thwarted because your income puts you above the Roth’s eligibility limits.
For 2023, the eligibility limit is $153,000 for single people ($161,000 in 2024) and $228,000 for those married filing jointly ($240,000 in 2024). But here’s one more perk: a workaround to the income limit rules.
With a little fancy footwork, an existing traditional IRA (or a nondeductible IRA) can be converted into a Roth, thanks to a strategy known as the backdoor Roth IRA. The catch is, of course, taxes: You’re required to pay income taxes on any contributions that were deductible, as well as any investment gains within the account before the conversion. Once you’re done settling your tab, voila: You have a Roth replete with all the built-in benefits.
» Ready to get started? Here are all of our top picks for the best Roth IRA accounts
