One of the more common investment options that financial gurus recommend for retirement savings is the Roth IRA. This type of retirement account has some features that are similar to the Traditional IRA option, but it also has some that are much different. Here are some of the reasons a Roth IRA can be a great option for saving for retirement.
There is a limit as to how much an individual can save in a Roth IRA. Those who haven’t yet reached 50 years old can contribute $6,000 per year as of 2019. Those who are 50 or above can make an additional catch-up contribution of $1,000 per year. This amount changes over time-based upon the rate of inflation. The income has to come from employment, but a nonworking spouse can contribute up to the limit as long as the other spouse works and earns at least the amount contributed. There are earnings limits, and those who exceed this amount will be limited in their ability to contribute. The income limit is $203,000 as of 2019.
One of the biggest differences between Roth and Traditional IRAs is the tax treatment each receives. Both are able to compound interest and dividends on a tax-free basis. Those who invest through a Roth IRA will save on an after-tax basis, while contributions to a Traditional IRA allow for a deduction from adjusted gross income, which will lead to a lower tax bill in the current year. Roth IRAs will not be taxed in the future because the IRS views them as already having been taxed. Withdrawals from a Traditional IRA will be taxed in the year the distribution is made. This money will be taxed at whatever rate is in effect when the withdrawal takes place.
Other Benefits Of Roth IRAs
Those who invest through a Roth IRA can use the account as an emergency fund. These investors can remove contributions at any time without penalty because the tax has already been paid. Any growth would be subject to a 10-percent penalty, however. Additionally, there are no required minimum distributions with a Roth IRA. Therefore, an investor can leave the money in the account to grow indefinitely. Those who hold a Traditional IRA have to take out the money on a schedule after hitting age 70.5, which could lead to a hefty tax bill. Roth IRA distributions would lead to no taxes as long as the investor has hit age 59.5.
There are many benefits to saving for a Roth IRA. The biggest benefit will be having money available for retirement. Other benefits are tied to having tax-free income after age 59.5 and the ability to use the contributions for an emergency fund prior to that age.