Roth IRA Benefits
What are the Roth IRA benefits?
What's the advantage over other retirement savings accounts?
Well, unlike conventional retirement savings vehicles, you can expect the following benefits from a Roth IRA...
Let's examine each of these benefits one-by-one...
Once you fund your Roth IRA, any investment gains grow tax-free in your account...
That's right. Tax free.
If you buy a stock, and it pays you a dividend...
You receive the entire dividend. Tax free.
No capital gains taxes. No income taxes. No taxes whatsoever.
How's this a Roth IRA benefit?
Think about it...
Let's say your capital gains tax rate is 15%.
You buy 50 shares of XYZ Company for $1,000.
A year later, you sell those same 50 shares for $2,000.
Your capital gain is $1,000.
Now, in a regular brokerage account, you'll owe the federal government 15% of that $1,000.
So you send off a check for $150 to the IRS, leaving you only $1,850 to reinvest in something new.
But in a Roth IRA...
You have zero capital gains tax, so...
You have $2,000 to reinvest instead of $1,850.
In the long-run, this is a significant advantage for your retirement savings and a notable Roth IRA benefit.
Tax-Free Qualified Withdrawals
While a Roth IRA lacks the tax deductibility of a traditional IRA, it has one major advantage...
Tax-free qualified withdrawals.
On the face of it, this doesn't look like a real advantage.
After all, so what if you don't pay taxes on the withdrawals... You just paid them up front, before you made your contribution!
But keep in mind that tax rates change, and most economists are forecasting higher tax rates for the future...
So why risk getting hit with a 50% income tax bill when you retire?
With a Roth IRA, you don't have to worry about rising income tax rates, because your withdrawals in retirement are tax free.
You simply make your annual Roth IRA contribution, and...
You never pay taxes again!
That sounds like a good deal to me...
Penalty-Free, Tax-Free Principal Withdrawals
This isn't the case with a Traditional IRA...
Since a Traditional IRA is tax deductible (meaning contributions are made pre-tax), you can't withdraw contributions before age 59 ½ without first paying income taxes.
Otherwise, everyone would contribute to an IRA and then immediately withdraw the same funds in order to avoid paying income taxes.
So anytime you withdraw money from a Traditional IRA, it's going to be subject to taxes, penalties, or both.
But that's not the case with your Roth IRA...
After all, you already paid taxes on that money before you used it to fund your Roth IRA.
And it is your money... Right?
Of course it is.
Luckily, in this case, the IRS has the same view. So you can withdrawal principal contributions before age 59 ½ tax-free and without penalties.
For instance, let's say you contribute $1,000 to your Roth IRA...
Six months later, your $1,000 contribution has accumulated interest of $200, for a grand total of $1,200.
Under the law, you can withdraw up to $1,000 from your Roth IRA without incurring additional taxes or penalties.
Because you already paid income taxes on your original $1,000 contribution, and it's your money...
So it's not subject to any additional taxes or an early withdrawal penalty.
However, the $200 in interest is considered investment return rather than principal, so it must be a qualified distribution in order to be withdrawn tax-free and penalty-free...
The ability to withdraw your original contributions tax-free and penalty-free is a substantial Roth IRA benefit.
Penalty-Free Withdrawals After Age 59 ½
With only a few exceptions, you can begin withdrawing money from your Roth IRA tax-free and penalty-free after age 59 ½.
This is the same age as a Traditional IRA, although distributions from a Traditional IRA are subject to income tax...
However, the Roth IRA benefits really kick in after you reach age 59 ½.
A Traditional IRA requires you to take mandatory distributions once you reach the age of 70...
But what if you don't need the money?
What if your investments just took a temporary nosedive?
The IRS could care less.
They require you to start taking money out of your Traditional IRA at age 70 ½.
But a Roth IRA doesn't have such arbitrary age limits.
If you don't need the money in your Roth IRA at age 70 ½, you can leave it in and continue to grow it tax-free until the day you do need it...
In fact, as long as you have earned income, you can continue to make annual contributions to your Roth IRA... at age 70 and long afterward.
This gives your Roth IRA tremendous flexibility over a Traditional IRA.
And flexibility is good, right?
It's just one of several Roth IRA benefits...
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