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While no retirement account is a perfect fit for everyone, the Roth IRA comes pretty close. It offers some benefits you won’t find with most other retirement accounts, and these could help you stretch your savings much further. Here’s a closer look at three reasons you might want to consider opening one this year.
1. Flexibility
Roth IRAs are among the most flexible retirement accounts out there. You can open and contribute to one as long as your income isn’t too high (more on that below). You might even be able to contribute to a Roth IRA if you’re not working, as long as you’re married to someone who earns at least as much as you contribute to the IRA.
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A Roth IRA also gives you the freedom to decide how you want to invest your money. While most 401(k)s only give you a choice of a few mutual funds, you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more with a Roth IRA. And you’re free to change your investment strategy as often as you’d like.
2. Tax-free withdrawals
Unlike traditional IRAs, Roth IRAs don’t give you a tax break up front. But because you pay taxes on your contributions, you get tax-free withdrawals later on. That means the government will essentially ignore any money you withdraw from this account when deciding how much you owe in taxes in retirement.
Roth IRAs also enable you to withdraw your contributions penalty-free at any age. Most other retirement accounts carry an early withdrawal penalty if you take money out before 59 1/2 without a qualifying reason. You could still face penalties if you try to withdraw your Roth IRA earnings before 59 1/2, though.
It’s also worth noting that just because you can take your money out of a Roth IRA at any time doesn’t mean you should. Doing so will set your retirement savings back, so it’s best to leave your money alone until retirement whenever possible.
3. No required minimum distributions
The Roth IRA is the only retirement account that doesn’t have required minimum distributions (RMDs). These are mandatory annual withdrawals at age 72 that everyone must take from their retirement accounts. It’s the government’s way of ensuring it gets a cut of your savings. But the laws governing Roth IRAs leave them exempt from RMD requirements.
No RMDs means you can leave your money in your Roth IRA to grow for as long as you’d like before you withdraw it. Or if you don’t need the money, you can pass it along as a tax-free gift to your heirs.
Who isn’t a Roth IRA good for?
Despite these benefits, a Roth IRA isn’t the best option for everyone. It may not even be an option for you if you’re a higher earner. If your income exceeds a certain amount for your tax filing status, you cannot contribute directly to a Roth IRA. However, you can still have a backdoor Roth IRA. This is where you put money into a traditional IRA and do a Roth IRA conversion in the same year.
A Roth IRA also might not be the best choice for those who believe they’re in a higher tax bracket now than they’ll be in once they retire. By stashing your money in a traditional IRA instead, you can put off taxes until you’re in a lower tax bracket, when you’ll lose a smaller percentage of your income to the government. But if you do this, you’ll owe taxes on your contributions and your earnings.
Even if you think a Roth IRA might be a good fit for you, it may not suffice as your only retirement account. You can only contribute up to $6,000 to a Roth IRA in 2022 or $7,000 if you’re 50 or older. If that’s not enough for you, you might have to pair a Roth IRA with another type of retirement account, like a 401(k). Start with your Roth IRA and then, once you’ve maxed it out, switch over to the other account for the rest of the year.
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