Who Should Use a Roth IRA?
The Roth individual retirement account (IRA) can be a powerful retirement savings vehicle. With a Roth IRA, you give up the immediate tax deduction you would get with a traditional IRA, but, in exchange, you have the ability to withdraw that money tax-free when you retire.
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Younger Workers
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A Roth IRA account can be particularly suitable for younger workers, because those workers have plenty of time to let their accounts grow and compound. If you are decades away from retirement, you can invest money in your Roth IRA every year until you retire, and by the time you are ready to stop working, you can have a substantial nest egg from which you can draw totally tax-free.
Future Taxes
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If you expect tax rates to be higher in the future, investing in a Roth IRA can be a prudent move. Because you can withdraw the money in your Roth IRA tax-free, the value of those withdrawals goes up as tax rates rise. The higher future tax rates go, the more valuable those tax-free withdrawals become, because you paid taxes at the lower rate when the money was deposited. A Roth IRA is also a good choice for investors who expect to be in a higher tax bracket when they retire than they are now.
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Aggressive Investments
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Roth IRAs are suited to aggressive investors, such as those who prefer to use individual stocks and high-turnover mutual funds. Because the money in the Roth IRA grows tax-free, there are no tax consequences as investors buy and sell stocks and funds within the account.
Other Retirement Savings
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A Roth IRA can be a good choice for workers who have high levels of savings in other retirement accounts and personal funds. The income generated by those investments in retirement could put those prepared individuals into a higher tax bracket, and that could amplify the value of a Roth IRA. In addition, Roth IRAs are not subject to the required minimum distribution provision like traditional IRAs are. That means retirees who have ample income from other sources can leave the money in their Roth IRA accounts and allow it to grow, rather than being forced to take the money out on a specific schedule when they reach age 70 1/2.
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