5 Roth IRA Tax Benefits You Don’t Want to Miss

The Roth IRA (individual retirement account) offers many attractive benefits that can accelerate your retirement success. If you’re on the hunt for more tax benefits that you can enjoy during your lifetime, don’t miss out on these five perks built into your Roth IRA package.

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1. Get your tax bill out of the way now

If you expect to be in a higher tax bracket later, it may be best to take care of your tax tab now. A Roth IRA allows you to do that.

Unlike a traditional IRA, your contributions are not deducted from your paycheck on a pretax basis. Therefore, you won’t get a tax deduction in the current year. But you’ll have a chance to contribute after-tax dollars and kiss your future tax worries goodbye if you follow all the rules.

Many young people rush toward the Roth IRA when they start their careers to beef up their tax-free retirement perks. Others take advantage of lower earning years to stuff money away into a Roth IRA. After your income soars beyond the annual threshold, you won’t be able to make direct contributions to a Roth IRA.

2. Allow your investments to grow tax-free

If you put money in a taxable brokerage account, you’ll have to pay taxes any time you earn money. Selling stocks for a profit would trigger capital gains taxes. You may also have to pay taxes on dividend income, even if the money never leaves your account.

Roth IRAs allow you to bypass complex tax calculations and annual payments to the IRS. When you contribute after-tax dollars to a Roth IRA, you excuse yourself from any future tax responsibilities, as long as your money remains in the account.

If you want to see growth in your account, you’ll have to invest your contributions. Here are some options that you may have:

Individual stocks
Exchange-traded funds
Mutual funds

Diversification is key, and sprinkling stocks in your Roth IRA can help you unlock higher returns. Even if you opted for an index fund, it may be possible to earn a 10% return, which is the average annual return of the S&P 500 from 1926 to 2018.

3. Build a tax-free retirement portfolio

With a Roth IRA, your future self will receive an attractive bonus: Tax-free withdrawals. Since you already paid your tax bill upfront, the Roth IRA allows you to withdraw all your earnings tax-free after you turn 59 1/2 and have met the five-year rule.

Let’s say you consistently contribute $6,000 to your Roth IRA yearly. If you hang in there for the long term (35 years or so), you can hit the million-dollar mark as long as you have an average 8% rate of return. When you see your account balance hit $1,000,000, you can jump for joy knowing that you won’t have to share any of your earnings with the IRS as long as you follow the Roth IRA rules.

4. Withdraw contributions tax-free

There’s one retirement account assumption that needs to be cleared up. Many people assume that all your money in a retirement account will be locked up until you reach a certain age. It doesn’t work like that with a Roth IRA.

Since you contribute after-tax dollars to a Roth IRA, you can always pull out what you contribute. Let’s say you contribute $24,000 over four years, and your account grows to $30,000. You can pull out your $24,000 worth of contributions without triggering taxes. But don’t touch your earnings too soon, or you’ll set off the IRS alarm.

5. Earn a Saver’s Credit if you meet the income requirements

If you’re on the fence about contributing to a Roth IRA due to your income status, you may be missing out on valuable tax perks. The IRS rewards retirement savers with a tax perk — the Saver’s Credit — for contributing to a qualified retirement account like a Roth IRA. This credit can reduce or potentially wipe away your tax bill. It is an early incentive for low- and moderate-income taxpayers to start tucking away money for retirement.

The tax benefits are closer than you think

The Roth IRA comes with a palette of tax benefits that you can enjoy now and during retirement. The sooner you start building your Roth IRA portfolio, the faster you’ll be able to slash your tax bill and move toward your million-dollar Roth IRA.

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