Over the past few years I've been noticing more and more financial professionals and internet "gurus" give the blanket recommendation to all readers that they should have a Roth IRA. Unfortunately, very few of them provide meaningful evidence as to why they've chosen to give this advice.
Roth IRA's are an imperative tool for retirement planning and come with a plethora of benefits. After reading this, I believe you'll have a better understanding as to why I feel this way and why I see them as such a powerful tool for mapping out your retirement.
#1 Roth IRA Accounts Are Tax Free After Age 59 1/2
Alright, alright this may not come as an absolute shocker to anyone out there but it is by and large the most important and well-known feature of Roth IRA's. So long as you have had your Roth IRA opened for at least 5 years and you are at least age 59 1/2 all your distributions from your Roth IRA are free of tax.
Another feature that further distinguishes Roth IRA's from Traditional IRA's is the fact that you may pull the contributions you have made into the account back out of your Roth IRA at any time - tax and penalty free. The earnings must remain but the amount that you personally put in is available to you if needed.
#2 Roth IRA Distributions Do Not Count As Income For Your Taxes
In my opinion, this is quite possibly the most important feature of Roth IRA's. When you take a distribution from your Roth IRA in retirement it is not counted against you as taxable income for that year. Meaning, if you built up a large enough Roth IRA to retire with you could potentially be taking out tens of thousands of dollars every year and still have a taxable income of nearly nothing.
Having less income in retirement also decreases the odds that you'll have to pay taxes on your social security. The more income you have to claim the more likely it is that you'll have to pay taxes on your social security money - and who likes to pay more in taxes? NO ONE!
#3 Roth IRA Accounts Give You Tax Diversification
We all should be aware of the importance of diversification when it comes to the asset classes you invest in but diversity can be equally as important when it comes to how your investments are taxed as well. Let's say you have 3 different types of investment accounts: a 401k, a Roth IRA, and a regular taxable investment account.
You may not realize this but you actually have three different buckets of taxable money; pre-tax (the 401k), tax free (Roth IRA) and post-tax (taxable investment account). This allows you to create a distribution strategy for retirement assets and take money out of specific accounts when tax conditions are most favorable. Why? Because it's not about how much you make but about how much you keep!
#4 Roth IRA's Have No Required Minimum Distributions (RMD's)
Last, but certainly not least, is the fact that Roth IRA's do not require you to begin taking distributions at age 70 1/2 like a traditional IRA does. You see, in a Traditional IRA Uncle Sam steps in once you've turned 70 1/2 and forces you to begin taking withdrawals from your account to ensure they receive their tax money before you die. How sweet, right?
Being that a Roth IRA uses money that has already been taxed and your earnings grow tax free the government has no incentive to impose these required distributions. So you can continue to let your money grow tax free until YOU decide that you would like to withdraw it.
Securities and Investment Advisory Services offered through Woodbury Financial Services, Inc., Member FINRA, SIPC FINRA, SIPC and Registered Investment Advisor. Insurance services offered through SAI Financial which is not affiliated with Woodbury Financial Services, Inc. Service offered only where licensed to do business. A Roth IRA distribution is qualified if you've had the account for at least five years and/or the distribution is made after you've reached age 59½, because of your total and permanent disability, in the event of your death or for first-time homebuyer expenses. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings. We suggest that you discuss tax issues with a qualified tax advisor.