The Advantages of Investing in a Roth IRA
The maxim, "good things come to those who wait" proves especially true with Roth individual retirement accounts. Though they do not offer the immediate benefit of a tax deduction like traditional IRAs, consider the other benefits offered by Roth IRAs before dismissing them from your retirement savings strategy.
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Tax-Free Distributions
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The most tantalizing advantage to investing for retirement using a Roth IRA is the promise of tax-free qualified withdrawals. Once you satisfy the two criteria, you can withdrawal money from your Roth IRA, including your earnings, without having to pay any income taxes. First, you have to wait five years counted from January 1 of the first tax year you made your contribution. Second, you have to be at least 59 1/2 years old or permanently disabled. You can also meet the second criteria by using up to $10,000 for your first house.
No Taxes on Growth
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Hopefully, the investments that you select for your Roth IRA earn you money each year. If you did not have these investments in the Roth IRA, you would have to pay taxes on these earnings as you went along. However, since the Roth IRAs shelter the investment earnings from taxes, you do not have to pay taxes on the earnings. Not only do you benefit by not losing part of your earnings to taxes, but you also benefit because that money you do not lose increases your earnings in future years.
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No Required Distributions
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Every other qualified retirement plan requires that you take minimum distributions during your lifetime. Roth IRAs, on the other hand, let you leave the money in your account as long as you live, which helps you maximize the advantage of the tax-sheltered growth. In addition, if you want to leave money to your children or grandchildren, you can let it continue to accumulate in the Roth IRA and your heirs can take tax-free distributions from the account.
Early Withdrawals Of Contributions
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With other types of tax-deferred retirement plans, you have to pay a 10 percent early distribution penalty on early withdrawals. Even with a Roth 401(k) or Roth 403(b) plan, your early distributions are split between taxable and nontaxable portions, with the taxable portions being subject to the early withdrawal penalty. With a Roth IRA, you can remove just your contributions at any time without paying any taxes or early withdrawal penalties.
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