What Is a Roth IRA?
Like all IRAs, Roth IRAs allow you to potentially grow your savings through investments and get specific tax benefits. Because the income you contribute to a Roth IRA account is taxed up front, there's no immediate tax break. But the money you contribute and any potential earnings you make on that money can grow tax-free.
Read the rest of this series:
- Roth IRA Contributions: 4 Things You Need to Know
- Must-Ask Questions: Roth IRA Withdrawals
- Roth 401(k) vs. Roth IRA
- Why Consider a Roth Conversion and How to Do It
- The Backdoor Roth: Is It Right for You?
Tax-free withdrawals
With a Roth IRA, you can withdraw your contributions at any time with no additional tax or penalty. After age 59 ½, you can also withdraw any earnings you've made with no tax or penalty as long as you've held the account for at least five years.
The benefit of paying taxes up front makes Roth IRAs an attractive option for retirement savings, especially if you expect to be in a higher tax bracket when you retire. On the other hand, if you need a tax deduction now or plan to be in a lower tax bracket when you retire, a traditional IRA could make more sense.
"Many investors choose a Roth IRA because they'd rather pay taxes now and avoid owing additional taxes when they take their money out for retirement," explained Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research.
"When you look at it that way, the potential tax savings of a Roth IRA can be fairly significant, assuming you continue to grow your savings and earn a return on your investments."
Other benefits of a Roth IRA
Though Roth IRAs don't offer a tax deduction up front, they do provide other benefits beyond tax-free growth and withdrawals:
- No age restrictions: You can contribute at any age, if you have earned income and your modified adjusted gross income (MAGI) falls within the IRS limits.
- No required minimum distributions (RMDs): Unlike most retirement savings accounts, Roth IRAs are not subject to required minimum distributions (RMDs)—withdrawals the IRS requires you to take each year, starting at age 73.
- No taxes for your heirs: If you pass your Roth IRA onto your heirs, they can generally withdraw the money tax-free as long as they follow the IRS distribution rules.
Summing up Roth IRAs
Roth IRAs are a useful retirement savings tool that can help you set money aside for potential growth. In addition to potentially boosting your retirement savings, they can provide greater flexibility for you and your heirs because of their unique tax rules. The trade-off is that you won't receive any near-term tax benefit. But you can look forward to potential tax savings in retirement.