Below is a list of the potential Roth IRA Benefits that could affect you, read each of them carefully to see if they apply to you or your Roth IRA Contribution Limits.
Benefits of Roth IRA
- Tax Free Withdrawals – You are allowed to withdraw any contributions (money that you have put in) from your Roth IRA tax free whenever you’d like. However any money earned in the account can only be withdrawn tax free if 5 years has passed or you are over the age of 59.5 years old. Unlike normal IRAs which you will be taxed for withdrawals if you are under 59.5 years old, as long as the 5 years has passed you will not pay taxes.
- Conversion Rules – You are permitted to convert a traditional IRA to a Roth IRA in many circumstances, although there may be some fees, the withdrawals will be tax free after certain conditions are met. After the standard 5 year period, you can withdraw the full amount of converted funds without any penalties.
- Flexibility – You can have both a traditional IRA and a Roth IRA and contribute to both at the same time. You can also have a 401k as well if that makes sense for your situation.
- Family Safety – If each spouse owns a separate Roth IRA, and one of them dies, the surviving spouse can combine the accounts with no penalty. Similarly, if a single parent dies, their Roth IRA can be passed on to one of their descendants.
- Certainty of Taxes – While it may seem like a negative sometimes that you must pay taxes on deposits, it protects you from any higher effective tax rates in the future when you wish to withdraw, so you can know with more certainty how much money you will have available to you when you are older.
- Passing on Wealth – Previously mentioned was that the Roth IRA’s assets could be inherited from the owner upon death, but to expand on that point, there is no mandatory age at which you must start withdrawing from your Roth IRA. This means that you could simple allow your assets in the account to keep appreciating to pass onto your family if you do not need it.
- Principal Residence Benefits – $10,000 in earnings in the Roth IRA are completely tax free when the money is used to buy a house (first time buying a house). This money can be used when the owner of the Roth IRA is purchasing the house, or can be used if a spouse or children are buying the residence as well. There are some minor restrictions to this, but is something that should be looked into.
- Contribution Limits – Here’s a benefit that can be deceiving at first, while the total maximum contribution limit is the same for your traditional and Roth IRA, the maximum contribution for each individually is effectively different. For example, if your maximum contribution is $5,000, and you want to put it all in a traditional IRA, you simply put in the $5,000. However, if you want to put the same $5,000, that is in after tax dollars, which means you are really contributing $5,000/(1- Tax Rate), where your tax rate is between 0 and 1 converted from a percent. In essence you can contribute more to your Roth IRA because you are paying the taxes on the deposit versus the withdrawal.
Roth IRA Benefits Summary
As you can see from above there are many benefits of a Roth IRA, see which ones affect you and if a Roth IRA is your best choice.