The Advantages of a Roth IRA

Have you been hearing about Roth IRAs and would like to know a little more? Are you curious about whether you're investing your money wisely? Maybe you're just tired of investing with the knowledge that you'll pay taxes through the nose when you finally retire someday.

 

Roth IRAs may be your best bet, if you fall under a certain income bracket. These requirements can change year-to-year, and may also be affected by your age group, so check with your financial advisor about the latest laws.

 

Consider these benefits:

 

• Roth IRAs have some significant advantages over most other investment and retirement instruments.

 

• They offer 100% tax-free profits, tax-free withdrawals and reduced estate taxes, just to name a few.

 

Roth IRA vs. Traditional IRA

 

Roth IRAs are different from Traditional IRAs in that the contributions you put in the IRA are not tax-deductible. But... Roth IRAs do not require you to start taking money out at a certain age, and all capital gains are yours to keep. This is HUGE!  You may have heard me speak about these benefits on the show.

 

Let me give you an example:  When you retire, you are allowed to pull money out of your IRA's.  Traditional IRAs have the money taxed as you pull that money out during your retirement because the money you put in was not taxed.  A Roth IRA has the money taxed before you put it in.  Then, when you pull it out during your retirement, it's not taxed - it was taxed before when you were putting it in.  So, let's say you put $50,000 into a Traditional and $50,000 into your Roth IRA before turning 55.  Your Traditional IRA gave you a tax break on the $50k while the Roth taxed you on that $50k.  BUT... and it's a big but, let's say you invested well in both accounts and that the $50,000 turned into $500,000 on both.  Wow!  You did well.  Once you retire and begin to take draws from your IRA's, however, you will see the difference.  You will be taxed on every bit of that $500,000 as it comes out of your Traditional IRA but your Roth IRA has already been taxed as it went in.  So, as you draw that $500,000 out of your Roth, it is tax-free!  Yeah.  Would you rather be taxed on $50,000 or on $500,000?  That is the difference between the Traditional and the Roth!

 

Because you use after-tax money to make your contributions, you don't get a tax deduction like you would with a traditional IRA. But that's okay.  You can even take a portion of your money out early without any penalty or tax ramifications.

 

Let's look at some of the advantages a Roth has to offer; you might just run out and open one today!

 

1. True tax-free wealth accumulation. All the money you make in your Roth IRA is yours to keep. The taxman can't touch it as long as you don't withdraw your profits before retirement. This makes a huge difference over time.

 

• Using after-tax money might hurt a little more when you're making the contributions, but it's a lot better than paying taxes on all the capital gains in your account when you start getting your money back out! Most would consider this to be the greatest advantage of a Roth IRA.

 

2. There are no mandatory withdrawal dates. You can keep the money in the account for as long as you like, unlike Traditional IRAs. where the government forces you to make withdrawals (they want those taxes!). This provides a greater length of time for your money to grow.

 

• Traditional IRAs require the owner to begin withdrawing funds by a certain age. And remember, those profits you made in a Traditional IRA are going to be taxed.

 

• The added timing flexibility can really make a difference. This is particularly true if you're in good health and likely to live for a long time. With a Traditional IRA, you might run out of money if your longevity is significant.

 

3. Estate tax reduction. Anything left in your Roth IRA will pass to your heirs tax-free. This is not true for a Traditional IRA. Knowing your spouse, children, or other heirs will get all the funds in your account can certainly be reassuring!

 

4. Early withdrawals of your contributions aren't taxed. Since the money you put in the account was after-tax, you can withdraw those funds without a penalty or tax. You can only withdraw what you put in, though, so you won't be able to withdraw the profits early without a penalty.

 

• Some special exceptions are available to use the funds to purchase a home.

 

• This increased flexibility can be advantageous when life's challenges find their way to you. But just like with any other investment, don't be tempted to withdraw the money if you don't really need it!

 

The Roth IRA has been around for several years now, but not everyone is familiar with the advantages it has to offer. The contributions sting a little more in the beginning, since you won't be able to take a tax deduction. But for most of us, that's a small price for having tax-free capital gains and the great flexibility offered with a Roth.

 

Overall, it's an excellent investment and retirement vehicle for most people and situations. Contact your financial advisor today to see if you're eligible to contribute to a Roth IRA. This kind of investment can really help get your retirement funding on track!

 

One of THE BEST books I have read on Tax-Free income is The Power of Zero.  You'll hear me recommend that book over and over and over again.  It is a gem!  You'll learn so much and all of it is Legal, legal loopholes that allow you to save money.  That's the smart way to invest and save!

 

 

Here are links to the books and products mentioned in this article.  Please use our Affiliate Links whenever possible and help support the show.  Thank you!

 

 

 

 

 

Combined authors with Michelle Russell  

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