Roth IRAs can be an excellent way to save for retirement or supplement other college savings accounts, while keeping in mind your contribution limits and consider using any tax refunds you receive to fund it.
Your Roth IRA funds may be managed through an approved custodian such as a bank or brokerage firm, with several advantages associated with investing in one:
Tax-Free Withdrawals
Roth contributions must have been made with after-tax money, meaning you won’t owe taxes when withdrawing funds in retirement. But you do need to follow certain rules, such as a five-year rule on distributions.
Your Roth account offers you the flexibility of investing in stocks, bonds and mutual funds – your custodian may provide options or you can work with a financial professional to select suitable investments for you. Common choices are ETFs and index mutual funds which have low investment fees while simultaneously diversifying your portfolio.
Target-date mutual funds, designed to change their asset allocation as you get closer to retirement, may help avoid taxes and penalties on withdrawals; though you should still remain mindful of your tax bracket.
No Required Minimum Distributions
Roth IRAs provide you with flexibility and don’t force you to take minimum distributions (RMDs) once you turn 70 1/2, unlike traditional retirement accounts which require RMDs. This is crucial because RMDs require you to withdraw money when you need it the most, possibly impacting the value of your investments and depriving you of crucial returns.
Your Roth IRA allows you to invest in various assets, such as stocks, exchange-traded funds (ETFs), mutual funds and real estate investment trusts without incurring taxes on those investments – potentially making for faster growth than non-Roth IRA accounts, according to Slott.
economists anticipate that federal and state income taxes will rise, making a Roth IRA an attractive choice for people expecting to pay higher taxes in the future. If you need help choosing which account type best fits you, contact a SmartVestor Pro near you who will assist in helping consumers invest and reach their financial goals.
Flexibility to Withdraw Funds
Traditional IRAs require you to take a minimum distribution by age 72; with Roth IRAs, however, no such distribution requirement exists; you simply must allocate the money carefully within your account.
Roth contributions and earnings may be withdrawn at any time without incurring taxes or penalties, although those under 59 1/2 may need to pay taxes on investment earnings that they withdraw from their account.
Roth accounts offer maximum flexibility to anyone needing funds for a down payment or emergency, such as job loss. However, you should keep in mind that withdrawing money from a Roth won’t qualify as qualified spending for retirement – these expenses should instead be saved separately outside the Roth.
Tax-Free Growth
Roth IRA contributions offer many tax-savings advantages if you expect to face higher income tax brackets during retirement.
Your Roth IRA options for managing it include managing it yourself, using one of many low-cost robo-advisors such as Betterment or Vanguard’s Robo-Adviser service offerings, working with an experienced financial advisor or opening an account at a bank. Furthermore, you could combine it with other retirement plans, such as 401(k)s or Simplified Employee Pension (SEP) plans for greater investment flexibility.
Before converting before-tax savings to a Roth IRA, it’s essential that you carefully consider whether its potential investment growth over your life time outweighs any costs related to paying taxes now. For those under 40, conversion may make sense because compound interest should help surpass taxes paid today.
