It’s estimated that roughly 10,000 people retire every day, climbing to 12,000 a day by the year 2028. Whether retirement is just around the corner or you’re only starting to plan how you’ll afford your golden years, a ROTH IRA is an excellent choice.
From tax advantages to the convenience these retirement accounts offer, there are plenty of reasons to diversify your portfolio and open a Roth IRA.
Interested in learning more? Then let’s take a look at some of the top benefits of opening a Roth IRA when saving money and managing finances for your retirement.
What Is a Roth IRA?
In short, a Roth IRA (Individual Retirement Account) is funded with after-tax dollars. This means the contributions you make are not tax-deductible.
However, as soon as you begin to withdraw the money you’ve contributed, it becomes tax-free money.
They differ from traditional IRAs that require pretax monetary contributions. Upon retirement withdrawal, you’d pay income tax.
Let’s take a deeper look at the financial benefits of a Roth IRA.
While you have to wait until retirement to benefit from the tax break associated with a Roth IRA, it’s worth it for those who expect to be in a higher tax bracket down the road.
You’re handling all taxes upfront, so, come retirement, the money (and earnings made) are yours, no questions asked or IRS to deal with.
Access Your Money Early
As you save for retirement, you may not plan to use the money early, but life is unpredictable and you may need to tap into those savings ahead of time.
This is where a Roth IRA is advantageous over a traditional IRA.
Early withdrawal penalties from a traditional IRA (exceptions not included) can be a bill added to your income tax and a 10% penalty for withdrawing money early. With a Roth IRA, however, as long as you withdraw the money you contributed and not any earning, you won’t have to pay a tax bill or the 10% penalty fee.
Looser Guidelines for Withdrawl
If by age 72 you don’t begin to make withdrawals from a traditional IRA, you could face a 50% penalty excise tax from the IRS.
Roth IRAs are much more lenient when it comes to required minimum distributions (RMDs). In fact, a Roth IRA is RMD-free. You can let your money stay within your Roth IRA for as long as you wish, continuing to let your investment grow free of taxes.
Benefits Your Heirs
When it comes time for your heirs to inherit your finances, they’ll find themselves with tax-free distributions from an inherited Roth IRA. With traditional IRAs, however, your heirs would have to pay taxes on anything to inherit.
To learn more about depositing money into a Roth IRA, read this guide for some of the best tips around.
Deciding to Invest in a Roth IRA
Now that you know some of the benefits of a Roth IRA, it’s time to discuss with your family or financial planner about the best way to diversity your portfolio, including opening up a Roth IRA. A Roth IRA is easy for most people to open up, and can prove invaluable when planning for retirement.
Interested in learning more great ways to manage your money and plan for the future? Then check out the rest of our website for tons of great articles about money and finance.