Roth IRA Benefits

Advantage of Roth IRA

KEY TAKEAWAYS:

• Accounts allow for tax-free growth with Roth IRAs
• Roth IRAs don’t require RMDs (Required Minimum Distributions) and don’t affect Social Security taxation
• A Roth IRA account does have contribution limitations

What is a Roth IRA

A Roth IRA is an Individual Retirement Account that allows you to contribute funds with after-tax dollars. Unlike traditional IRAs, contributions to a Roth IRA do not provide immediate tax benefits. However, the real advantage is that your contributions and earnings can grow tax-free.

Once you reach the age of 59½ and your Roth IRA has been open for at least five years, you can withdraw funds from the account without incurring taxes or penalties – you can always withdraw the amount you contributed.

Advantages of having a Roth IRA

Here are eight things you need to know about the Roth IRA:

1. Roth IRA Contributions Are Not Tax-Deductible But Grow Tax-Free

The key benefit of a Roth IRA is its tax-free growth and tax-free withdrawals during retirement. The Roth IRA will not be counted as Provisional Income or Adjusted Gross Income for social security. This makes it an attractive option for individuals anticipating a higher income tax bracket or looking to minimize their taxes in retirement. By paying taxes upfront on contributions, you can enjoy significant tax savings during retirement when you withdraw funds without tax liabilities. In comparison, if you invest in a nonretirement or brokerage account, your earnings are subject to federal, state, and local yearly taxes.

It’s important to note that eligibility for a Roth IRA is subject to income limitations. Not everyone will qualify to open this type of retirement account. However, if you meet the income requirement, a Roth IRA can be a valuable addition to your retirement savings strategy.

2. You Can Withdraw Roth IRA Contributions Out at Any Time

While contributions to tax-deferred accounts like a traditional IRA or 401(k) typically can’t be withdrawn without paying taxes and a penalty, Roth IRAs offer penalty-free and tax-free withdrawals of the contributions at any time.

Roth IRA earnings are subject to withdrawal restrictions, but in general, you can avoid taxes and penalties by waiting until you reach 59 ½, and the Roth IRA account must be at least five years old. If you’re 59 or under, qualifying exemptions may allow you to avoid withdrawal penalties and income tax bills, but you will still be subject to taxes if you have had the account for less than five years.

If your financial plan involves relying on your retirement savings to get you through a pre-retirement financial emergency, you should have a Roth IRA as part of your portfolio.

3. There’s No Age Limit For Contributions

As you approach and enter retirement age, the government begins to curtail your ability to contribute to tax-deferred accounts. With traditional IRAs, for example, you can no longer make contributions after you turn 72.

You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below specific amounts.

4. There Aren’t Any Required Minimum Distributions

Unlike other retirement accounts, Roth IRAs offer the unique advantage of no required minimum distributions. Required minimum distributions (RMDs) represent individuals’ minimum annual withdrawals from their retirement accounts. These distributions are mandatory and apply to various retirement accounts, including traditional 401ks, IRAs, SEP IRAs, SIMPLE IRAs, and specific employer-sponsored retirement plans.

Typically, individuals are required to commence RMDs when they reach the age of 72.

Your Beneficiaries Will Be Tax-Free (from your Roth IRA Benefits)

The benefits of a Roth IRA extend beyond your lifetime. Your loved ones can inherit the total amount tax-free by ensuring your account is open for at least five years and designating a qualified beneficiary. It’s a practical and urgent opportunity to safeguard your legacy.

Start taking full advantage of your Roth IRA today and secure a tax-free inheritance for your beneficiaries. Act now and pave the way for a brighter financial future.

5. Annual Contribution Limits Are Fairly Low

Contribute up to $7,000 to your Roth IRA in 2025. And if you’re 50 or above, you can expedite your savings by adding another $1,000 for a total of $8,000.

If you’re married and file taxes jointly, you can establish a Roth for a non-working spouse. This means you can double your contributions within a tax year, making significant savings for you and your spouse.

The maximum total annual contribution for all your IRAs combined is: Tax Year 2024 and 2025 – $7,000 if you’re under age 50 / $8,000 if you’re age 50 or older.

6. There is an Income Cap

While having an income is the only requirement for opening a Roth and making contributions, it’s important to note that there are limits on your income.

For the most recent tax year, the eligibility to contribute to a Roth IRA starts to phase out at higher income levels. Specifically, for joint filers, the phase-out begins at $204,000, while single filers start to phase out at $129,000. As income surpasses $214,000 for joint filers and $144,000 for single filers, the contribution limit drops to $0.

Higher earners can still get many of the benefits of a Roth IRA through alternative strategies like “the Rich Person’s Roth” or by converting a traditional IRA through a process known as the “backdoor conversion.”

7. Earn too Much? Sneak in the Back Door.

As mentioned above, there’s a workaround to the Roth IRA income limit known as the “backdoor conversion.” This allows a traditional IRA holder to convert their account into a Roth IRA even if they exceed the contribution income limit.

The catch is that you’ll only have to pay income taxes on the converted amount. It may also increase your taxable income in the year of the conversion, further increasing your tax liability.

Additionally, the converted funds are considered Roth IRA earnings, not contributions, so you’ll want to wait five years from the conversion date to withdraw money without paying a penalty.

Because of the tax implications, if you’re interested in executing a backdoor conversion, it should be part of a strategic retirement plan considering these details.

8. Get Professional Advice

Have Roth IRA Questions?

A Roth IRA account can be one of your greatest retirement assets and offers several advantages over a traditional IRA. Since nobody knows what taxes will be in the future, using a Roth to ensure your contributions grow tax-free, as well as your investment gains, can help create a more sustainable retirement plan.

Don’t have a financial plan? Or not sure how a Roth IRA may fit into it?

Ultimately, the decision to work with a financial advisor for your Roth IRA depends on your unique circumstances, financial goals, and comfort level. Engaging a financial advisor may be beneficial if you feel uncertain about investment strategies, tax implications, or long-term planning.

One of our financial advisors can help. Request a complimentary, no-obligation consultation with a financial advisor today to get started!