Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that the plan’s investments grow tax-free and come out tax-free. But if tax-free investing isn’t enough to get you excited, rest assured, there are more benefits to the Roth IRA. I’ll note just three more in this article.
Remember, Roth IRAs are for nearly everyone with earned income. They’re not restricted to high-income earners. Check out my prior article here if you’re unfamiliar with the back-door Roth IRA. Okay, now let’s cover the other perks of Roth IRAs.
No Required Minimum Distributions
First, Roth IRAs are not subject to RMD. Traditional retirement plan owners are subject to rules known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 72. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax-free income (free of the capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax-free income during the account owner’s lifetime. Learn more about the facts and fiction about IRA RMDs here.
Spousal Rollover: The Best Asset to Leave to Your Spouse
Second, a surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or can combine that Roth IRA into their own Roth IRA. Allowing the spouse beneficiary to take over the account allows additional tax-free growth on investments in the Roth IRA account.
Tax and Penalty-Free Withdrawals Before Age 59 1/2 On What You Put In
Third, Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 1/2 on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early-withdrawal penalty and taxes too, but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax-free). This makes the Roth IRA the most powerful savings account out there because you can take out what you put in without penalty or tax for whatever reason you may have and hardship is not required. Traditional IRAs have no such benefits.
Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leaves out many high-income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.