The Roth IRA is probably the best retirement vehicle ever invented in the U.S. Here’s why. In the film “The Empire Strikes Back” Lando Calrissian says, “I’ve just made a deal that will keep the empire out of here forever.” That’s what a Roth IRA does with the taxman Darth Vader, head of the despised galactic empire.
A Roth’s ability to help you legally avoid taxes on investment gains is its most well-known and probably biggest advantage over a traditional IRA, but that’s not the only one. So here’s why I’m all in on my Roth, pouring all my retirement-savings dollars into the account and avoiding the traditional IRA (with one exception).
Benefits of Roth IRA over traditional IRA
As soon as I heard about the Roth IRA, I was intrigued. At the time I was a grad student in literature but focused on investing for my future. But even in these straitened circumstances, the Roth immediately appealed to me for the following reasons.
1. There’s a small hit now, but a big break later
The hook for me was the ability to keep Uncle Sam out of my piggy bank forever. Sure, there was a limit on what I could tuck away each year — in 2017 and 2018, it’s $5,500 if you’re under 50 years old — but any gains were forever mine (as long as I left them in past age 59½ and had the account open for five years). I could add to the account every year and roll gains up tax-free.
I would have to pay taxes first on the money going into the Roth account today, but I’d get the real tax benefit years later. That’s in contrast to the traditional IRA, where you pay with pretax dollars and receive a tax break today. But with the traditional IRA you have to pay tax on any money that came out of it.
The Roth IRA changed much of what was onerous about the traditional IRA.
When I was a penny-ante grad student being taxed at 10% rates, the traditional IRA’s tax benefit was almost meaningless to me. It made the most sense to go all Roth because I expected my future tax rates to be higher.
2. It’s easier to understand and manage
The second reason I was enamored with the Roth: It eliminated much of the headache of dealing with the special requirements of a traditional IRA, of which there are a ton. With the traditional IRA, you have to:
- Take minimum distributions after a certain age (70½), or suffer severe penalties
- Calculate those required minimum distributions (and pray you’re right)
- Tie up your money until retirement under threat of substantial penalty
The Roth IRA changed much of what was onerous about the traditional IRA, and that was a huge bonus for me. I hate combing through all the trap doors and loopholes to make sure I don’t run afoul of the IRS rules on IRAs.
For example, the Roth swept away the traditional IRA’s required minimum distributions in retirement. You can hold your money in a Roth indefinitely, if you don’t need it, and it can pile up gains. Plus, unlike the traditional IRA, you can continue to contribute to the Roth even after age 70½ as long as you have earned income. The Roth is a lifelong savings vehicle.
3. You can pass it on
And here’s why you might want to hold that Roth indefinitely: You can pass it to your spouse, who can treat it as if it were their own Roth. They’ll never have to take distributions, either. So when I got married, it made sense to continue to invest in the Roth for my wife (and her for me).
It gets better: Your spouse can pass the Roth on to heirs. However, if you leave the Roth to anyone other than a spouse, they’ll have to take required minimum distributions, though they will still enjoy tax-free withdrawals. Who wouldn’t enjoy that?
4. It’s more flexible
With my tight grad-school budget, wasn’t contributing to a retirement plan setting me up for disaster if I suddenly needed money, say for school or an emergency? Not with the Roth IRA. The Roth rules allow you to take out your contributions (but not your gains), even before retirement, without penalty or tax. So saving for the future wasn’t going to hurt me if I truly needed the money today. (Of course, NerdWallet strongly encourages you to leave your retirement accounts in place and find money elsewhere.)
All this flexibility and the ability to build a tax-free retirement sounded great to me, and it sounds even better today, as tax rates are at historic lows. That could make the Roth an even better choice, and it’s another reason why I continue to stick with the Roth.
» Ready for a Roth? Learn how and where to open a Roth IRA
The only time I use the traditional IRA
I do use the traditional IRA in one circumstance, but it’s the only one. The Roth IRA puts limits on your eligibility, according to your adjusted gross income ($133,000 for individuals and $196,000 for married filers). But you can still slip in through what’s called a backdoor Roth IRA. In this method, you deposit money in a traditional IRA, then immediately convert it to a Roth IRA.
This method requires a little footwork, but it’s not difficult, and I think it’s worth the extra 15 minutes a year to get the advantages of the Roth IRA and keep the empire out of here forever.