It’s easy to overlook the Roth IRA with its low annual contribution limits and income limitations, but this account is one of the most popular retirement accounts around for good reasons. It offers some rare perks you won’t find with any other retirement account. Here’s a look at three reasons you should consider opening one ASAP.
1. Tax-free retirement withdrawals
The biggest difference between Roth IRAs and most other retirement accounts is when you pay taxes on your money. Traditional retirement accounts give you a tax break in the year you make your contributions, but they require you to give a cut of your contributions and earnings to the government when you withdraw the money later.
Roth IRAs don’t give you an upfront tax break, but once you’ve paid taxes on your contributions, you’re mostly off the hook. The government won’t take a cut of your withdrawals as long as you wait until you’re at least 59 1/2 and have had your Roth IRA for at least five years before taking out any of your earnings. You can withdraw your contributions penalty- and tax-free at any time.
2. No required minimum distributions (RMDs)
Roth IRAs are the only retirement accounts that don’t have required minimum distributions (RMDs) for adults 72 and older. These are mandatory withdrawals you must make from your other retirement accounts each year, and they vary depending on your account balance and your age. Failure to take your RMDs results in a 50% penalty on the amount you should’ve withdrawn.
The government does this to ensure it gets its cut of your retirement savings, but because you pay taxes on your Roth IRA funds upfront, there’s no reason for it to force you to make withdrawals from this account once you turn 72.
This means you can leave your funds to grow as long as you’d like before withdrawing them. Or you don’t have to withdraw them at all. If you don’t need the money, you can pass it along as a tax-free gift to your heirs.
3. Freedom to invest how you want
Those who invest in a 401(k) are typically restricted to a few mutual funds or exchange-traded funds (ETFs) that their employer selects. But IRAs give you a lot more options. You can invest in mutual funds or ETFs here as well, or you can invest in individual stocks, bonds, or even real estate.
This freedom enables you to tailor your investment portfolio to better match your risk tolerance and your retirement timeline. You’re also free to change up your investments as often as you’d like.
So is a Roth IRA right for you?
A Roth IRA is a great fit for many workers, especially those who believe they’ll pay less in taxes now than they will once they retire. These individuals will save themselves a lot of money by paying taxes on their contributions upfront as opposed to paying taxes on contributions and earnings later.
But they’re not right for everyone. Roth IRAs have income limitations that restrict high earners’ ability to contribute to one of these accounts directly. If you’re not able to stash money in a Roth IRA, you can achieve a similar result by putting your money in a traditional IRA and doing a Roth IRA conversion in the same year.
Finally, a Roth IRA might not be enough on its own for those who plan to set aside large sums for retirement. You can only contribute annually up to $6,000 to a Roth IRA in 2022 or $7,000 if you’re 50 or older. If you want to save more than that, you’ll need to use another account.
If you think a Roth IRA might be right for you, you can open one with a lot of brokers. Do some investigating to see which one offers the best investment options and fewest fees and then open an account. See if you can set up an automatic contribution schedule as well so you don’t have to remember to make contributions on your own. Once that’s done, all you have to do is check in once in a while and watch the money stack up.
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