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The world of individual retirement savings accounts isn’t exactly known for its rapid innovation. Consider the . The account’s key features have barely changed since it was rolled out in 1997.
That’s not necessarily a knock. In fact, it could be considered an accomplishment because, all these years later, the benefits of the Roth continue to serve consumers well.
Below are five of the most notable advantages the Roth IRA offers over other retirement accounts.
The most obvious difference between a traditional IRA and the Roth is how each account deals with taxes. A offers an upfront tax break: Contributions may be deductible in the year they are made to the account. When you pull money out of a traditional IRA in retirement, you owe income taxes.
With the Roth, you have to wait longer for the tax-savings payoff. But it’s worth it, especially for those who predict their tax rate will be higher later than it is now.
Because you took care of your tax tab upfront — funding the account with post-tax dollars (remember, Roth contributions are not deductible) — as far as the IRS is concerned, its business with you is complete. When you start making withdrawals in retirement you owe nothing — not even for the earnings on your investments. The money is yours, free and clear.
Ideally, the money you put away for retirement remains squirreled away and untapped until retirement. But at those times when you really need the money, the Roth makes early withdrawals much easier than the traditional IRA.
If you take an early withdrawal from a traditional IRA before age 59½, you'll likely face both an income-tax bill and a 10% early withdrawal penalty. (There are some exceptions; read more about .)
You can dodge both the taxes and the penalty with a Roth as long as the money you withdraw comes from your contributions and not earnings. This makes it a more reasonable choice when your emergency fund needs access to its own emergency fund. (Be sure to follow to avoid triggering a taxable event.)
Money in a traditional IRA is subject to RMDs, or required minimum distributions, which means savers are required to start withdrawing from their accounts at age 72. Forget to cash the check, and the IRS could hit you with a punishing 50% penalty excise tax on the amount you didn’t withdraw.
The Roth, on the other hand, is RMD-free: Original account holders are free to let all of their money stay put for as long as they're alive, which means:
Looking to secure the posthumous adoration of your beneficiaries? That’s one of the possible benefits of a Roth IRA, too.
Unlike money left via a traditional IRA or other retirement accounts, such as a 401(k), where the requirement to pay taxes on withdrawals passes down to heirs, distributions from an are tax-free.
The previous four benefits may have persuaded you to open a Roth IRA (here’s ), but your plans may be thwarted because your income puts you above the Roth’s eligibility limits. In 2021, your modified adjusted gross income must be below $140,000 (single filers) or $208,000 (married filing jointly). But here’s one more perk: a workaround to the income limit rules.
With a little fancy footwork, an existing traditional IRA (or a nondeductible IRA) can be converted into a Roth, thanks to a strategy known as the . The catch is, of course, taxes: You’re required to pay income taxes on any contributions that were deductible, as well as any investment gains within the account before the conversion. Once you’re done settling your tab, voila: You have a Roth replete with all the built-in benefits.
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