Let’s be honest, no one likes to think about planning and saving for retirement. The thought of putting your hard earned money away to an account that you cannot touch until you are 65 isn’t a desirable concept, but it’s oh so very necessary! You have to find a financial balance within your retirement account for it to grow. A Roth IRA could be the best tool in your retirement portfolio and you may not even know it.
Whether you are new to retirement saving or a seasoned veteran, a Roth IRA can be a welcomed addition to your portfolio. Along with your 401(K) and traditional IRA, this account will allow for increased flexibility with your current retirement planning.
What is a Roth IRA and Why is It So Special?
A Roth IRA is an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.
Tax- Free Growth
This plan sounds pretty simple, right? Well, that is because it is. Roth withdrawals in retirement are tax-free, unlike payouts from traditional IRAs, which are taxed at your top tax bracket. This benefit is the perfect incentive for young savers. With a Roth, you will not be subject to the higher tax rate on your withdrawals if you are working after 59 1/2. Other than growing TAX-FREE, having a Roth has some other serious benefits.
Penalty Free Withdrawals (Generally)
Most retirement plans penalize you for making any withdrawals before retirement but, this is not the case with a Roth. You can withdrawal your contributions, if you need, at any time without paying taxes or penalties. The earnings in your account, meaning the money your money has made for you, must remain there for at least five years or until you are 59 1/2, or it will be subject to penalty and tax.
First Home Withdrawals
In addition to the ability to withdraw all your contributions after five years, if needed, you can also withdraw for a new home. Up to $10,000 of your earnings can be withdrawn without penalties or be subject to tax if you are using the money to buy your first home. This incentive is a benefit that could come in handy.
Unlike most 401(K) retirement plans which mandate that all contributions have to be made by the end of the calendar year, you have until Tax day of the following year to make your contribution. Meaning any money you put towards your $5,500 contribution limit before April 15th, can be applied to your account for the prior year.
Take It or Leave It
With a traditionally IRA or your 401(K), you must start your retirement distributions by age 70 1/2. A Roth IRA will allow you to keep your money in your account as long as you like. If you never decide to take a distribution, you can Will your funds to an heir, and they can withdraw tax-free distributions. The only caveat is that the heir must start annual withdrawals or RMD, the death year of the account holder.
Find out if a Roth IRA is right for you, take the quiz here.
Bonus Tip –
Because the contributions to your Roth IRA are an after-tax deposit, you can open an account at any time. I started my Roth when I was just 17 years old and it has been growing ever since. The earlier you start, the better to allow for maximum growth.
Have tips or questions about saving for retirement, let me know in the comment section below.