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For Your Life April 19, 2022

7 Top Benefits of Roth IRAs That You Don't Want to Overlook

The Roth IRA (individual retirement account) is bursting with benefits that can make saving for retirement a bit more exciting. If you don't want to leave any perks on the table, take a moment to review these seven benefits below. They will confirm why the Roth IRA is one of the greatest retirement accounts since sliced bread.

1. You can get tax-free income during retirement

If you want to enjoy a tax-free lifestyle during retirement, a Roth IRA is an account to consider. Since you contribute after-tax dollars to the account, you can withdraw your earnings tax-free after you have met the five-year rule and turned 59 1/2.

Make sure you contribute as much as possible every year that you're eligible, so that you can rack up more tax-free income later. If you accumulate a million-dollar Roth IRA, you won't have to worry about sharing your earnings with the IRS if you follow the rules. 

2. Your contributions won't be locked up forever

It's a bit easier to make Roth IRA contributions when you know that all your money isn't locked up forever. This is one benefit that distinguishes the Roth IRA from most other retirement vehicles.

Let's say you contribute $6,000 to a Roth IRA this year. Over the next two years, your investments grow to $9,000. You can always take out the $6,000 whenever you want -- no questions asked. It's the $3,000 growth in your account that you don't want to mess with until you're eligible to do so. Touching the earnings in your account could trigger taxes and penalties.

3. You can invest in individual stocks 

If you're looking for a way to invest in your favorite stocks, a Roth IRA may be a smart place to house your investments. Unlike an employer-sponsored plan, you have more flexibility over the type of investments you can choose. 

Here are a few types of stocks you may have access to: 

  • Mid-cap stocks
  • Small-cap stocks
  • International stocks
  • Growth stocks
  • Value stocks
  • Dividend stocks 

The type of stocks you select for your Roth IRA can allow you to supercharge your portfolio and accumulate the profits you seek.

4. You can contribute at any age if you have earned income

Age is not a prerequisite to contribute to a Roth IRA account. As long as you have earned income for the year and your income doesn't exceed the limits, you can make a direct contribution to a Roth.

This is a perfect opportunity for kids who earn money to get a head start on their retirement-savings fund. An adult can open and manage the account until the child is old enough to control it. By starting now and making consistent contributions, a child can become a millionaire before retirement. 

5. There are no required minimum distributions 

If you have a traditional IRA, you're required to start withdrawing funds at a certain age. This is because of the required minimum distribution rules. Those rules don't apply to Roth IRAs. You can contribute to your account for as long as you qualify, and keep the money in your account for as long as you want. This makes it easier to accumulate more tax-free income in your account. 

6. You can sell stocks in your account without worrying about taxes

If you decide to sell any assets in your Roth IRA, you won't be stuck with a tax bill, as long as the money stays in your account. Typically, you would be subject to capital gains taxes anytime you sell stocks for a profit. But the Roth IRA allows you to buy and sell assets anytime you want without thinking about taxes.

Let's say you want to sell a stock in your portfolio that rose from $1,000 to $3,000 per share. You can sell the stock and buy other assets in your Roth IRA with that money. You won't have to report your transaction to the IRS. 

7. You can transfer money to your heirs tax-efficiently

As long as you've held your account for five years, your heirs may be able to withdraw money from your Roth IRA tax-free for a certain period of time. That's because you've already paid taxes on your contributions in the years in which you funded the Roth IRA.

This makes the Roth IRA a great generational-wealth strategy. If you don't need to use the money in your Roth IRA while you're living, you can allow your heirs to enjoy the fruits of your investments. 

 

This article was written by Charlene Rhinehart, CPA from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

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