10 Reasons to Save for Retirement in a Roth IRA
Tax diversification
Roth individual retirement accounts allow you to pay income tax on your retirement savings upfront, so you won't be stuck with a tax bill in retirement when you can least afford to pay it. Roth IRA account owners are often allowed to take tax-free distributions in retirement and can completely avoid paying taxes on their investment growth. Here are the reasons you should consider contributing to a Roth IRA.
Prepay your retirement tax bill.
You contribute dollars that you have already paid taxes on to a Roth IRA. So, Roth IRAs are often especially beneficial for people who are in low tax brackets. Even if you jump into a higher tax bracket later or if tax rates are raised, you already paid taxes on your Roth contributions and likely won't have to again.
Tax-free withdrawals in retirement
Roth IRA distributions that are taken after age 59½ from accounts that are at least five years old are tax-free. In contrast, you will owe income tax on each withdrawal from traditional IRAs and 401(k)s.
Tax-free investment growth
You don't have to pay income tax on investment gains or interest earned within your Roth IRA each year. And if you wait until after age 59½ to take distributions and your account is at least five years old, you won't ever have to pay tax on your Roth IRA investment earnings.
More flexibility in retirement
Withdrawals from traditional 401(k)s and IRAs are required each year after age 70½, and there's a 50 percent tax penalty if you miss a distribution. But Roth IRAs don't have any withdrawal requirements during the lifetime of the original account owner. The money can continue to grow tax-free for the rest of your life.
Easier access to your money before retirement
Roth IRA withdrawals before age 59½ trigger a 10 percent early withdrawal penalty and income tax only on the portion of the withdrawal that comes from investment earnings. As with traditional IRAs, penalty-free early withdrawals are allowed for a variety of reasons, including college costs, first-time homeownership expenses, health insurance premiums after job loss and significant unreimbursed medical costs.
Leave tax-free money to heirs.
Beneficiaries must pay the taxes on money you leave to them in a traditional 401(k) or IRA. However, your children and grandchildren can take tax-free withdrawals from the Roth IRA they inherit from you.
Maximize tax-sheltered assets.
The money in your traditional 401(k) or IRA doesn't completely belong to you because you still owe taxes on it. But you have already paid taxes on all the money in your Roth IRA using money outside of your retirement accounts, which allows you to shelter as much money as possible from taxes within the account. All the money in your Roth IRA will be available for spending in retirement.
Later contribution deadline
Retirement savers can contribute up to $5,500 to a Roth IRA in 2015, or $6,500 if they are age 50 or older. While 401(k) contributions are typically due by the end of the calendar year, you can make Roth IRA contributions up until the tax-filing deadline on April 15.
Roth IRA conversions
While there are income limits for Roth IRA contributions, almost anyone can convert traditional IRA assets to a Roth if they are willing to pay income tax on the amount converted. This maneuver is particularly beneficial if you make the conversion and pay the resulting tax bill in a year when you are in a particularly low tax bracket. You can also convert a small amount each year to avoid an abnormally large tax bill.
Get the saver's credit.
While Roth IRA contributions won't get you a tax deduction, they can qualify you for the saver's credit. If your income is below $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015, a Roth IRA contribution will qualify you for a tax credit worth between 10 percent and 50 percent of the amount contributed up to $2,000 for individuals and $4,000 for couples.
Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google+ or email her at ebrandon@usnews.com.
