5 Advantages of a Roth IRA

One feature that makes the Roth IRA stand out from most traditional retirement accounts (such as a Traditional IRA, most 401ks, 403b, traditional pension plans, etc) is the fact that you pay with after tax dollars. In other words, you do not receive a tax deduction for your contributions and technically, this means that you are paying taxes before you even decide how to invest your money!

Even though this can be seen as a negative feature, there are several advantages to choosing a Roth IRA (a couple are even direct consequences of being taxed upfront)!

1. Tax-Free Growth

Normally, when you open an investment account you have to pay taxes on your gains. So if you buy a stock and then a dividend is paid or you decide to sell, you will have to pay capital gains taxes on this amount.

In contrast, once you fund your Roth IRA account, you don’t have to worry about paying taxes at the end of the year when you have a gain. This goes for all capital gains, dividends, coupon payments, or any other gain that you experience during the year.

So if you are looking to invest your money for the future, it pays to use a retirement account such as a Roth IRA so that you can take nearly full advantage of compound interest.

Of course, this advantage is also shared by a Traditional IRA, so now we will consider what makes the Roth IRA stand out even when compared to a Traditional.

2. Tax-Free Withdrawals

For most people, this is the biggest advantage to a Roth IRA. The fact that you do not get to take a tax deduction on your contributions allows you to legally avoid paying taxes when you take a qualified withdrawal from the account!

What this means is once you put money into a Roth IRA, you will never have to worry about paying taxes on that money (as long as you satisfy the requirements).

You have to wait until you are at least 59 1/2 years old before taking a distribution from your account (with one exception which we will discuss below), but if you do that, then you are in the clear.

The really great advantage to a Roth IRA is that this rule not only applies to the money that you contribute, but also to any gains on your investments over the years! So if you follow the rules, you only pay taxes when you contribute to the account, and you will never have to worry about uncle Sam again!

3. You Can Withdraw Your Contributions at Any Time

Another great thing about a Roth IRA is that you can withdraw your contributions at any time, even if you are under 59 1/2 years old. The only stipulation to this is that your Roth IRA must have been open for at least five years. After that point, your contributions are free for you to withdraw without penalty.

Of course, since it is a retirement account, you should use caution before deciding to withdraw your contributions; but the fact that you have that option available is enough to tip the scales in favor of the Roth for many people.

So the bottom line is that you will never pay any taxes on any growth or earnings that your IRA fund will generate after turning 59 1/2, and if you run into an emergency, you can even withdraw your contributions without penalty.

4. No Mandatory Distributions

With a Traditional IRA you are forced to start taking annual distributions once you hit age 70. So even if you don’t need the money or your investments tanked in the short term, the IRS will make you start taking distributions.

Fortunately, with a Roth IRA, there are no required minimum distributions, and no taxes assessed for failing to make withdrawals – since the initial contributions were already taxed.

This is a huge advantage for those worried about preserving their wealth even in retirement (especially considering the fact that those forced distributions from your traditional account will be taxed).

5. No Age Limit on Contributions

Another thing to consider with Roth IRAs is that you can make contributions to the account even after you turn 70 1/2 (something which you cannot do with a traditional account). So at the time that you would have been forced to start taking distributions from your Traditional account, you can still make contributions to your Roth!

On top of this, you are also able to leave amounts in your Roth IRA for as long as you live.

By the way, if you want to open up an easy Roth IRA, try Betterment (see review).

Can you think of any other advantages to a Roth IRA? Do you view any of these as a disadvantage? If so, why? Leave a comment!