See why a Roth IRA is the most versatile account in your portfolio.
Planning for retirement

3 key benefits of a Roth IRA

6 minute read
  •  
March 16, 2022
Planning for retirement
Roth IRAs
Article
Page
Taxes
RMDs
Retirement
Retirement contributions

Roth IRA is a type of individual retirement account that’s funded with after-tax money. It offers tax-free growth and tax-free withdrawals in retirement with one caveat: You can’t deduct the amount you contribute from your annual income taxes.

If you already have a Roth IRA, you may be surprised at how versatile your retirement account can be. If you don’t have a Roth IRA, here are 3 reasons to consider opening one today.

  1. Tax-free growth
  2. Tax-free withdrawals in retirement
  3. You decide when, if, and how to take withdrawals

1. Tax-free growth

The money you invest in a Roth grows tax-free, so you don’t have to worry about reporting investment earnings—the money your money makes—when you file your taxes. For comparison, if you invest in a nonretirement account, your earnings are subject to federal, state, and local taxes each year.

 

2. Tax-free withdrawals in retirement

If you’re age 59½ or older and have owned your account for at least 5 years,* you can withdraw money—contributions plus earnings—from your Roth IRA without paying any penalties or taxes. So even if you take a lump-sum withdrawal in retirement, your income won’t be affected. This is a valuable benefit because your income impacts how much you pay in taxes—including the taxation of Social Security benefits—as well as Medicare Parts B and D premiums.

 

3. You decide when, if, and how to take withdrawals

Unlike a traditional IRA, a Roth IRA has no lifetime required minimum distribution. However, you can take out what you contribute at any time, free and clear. It's smart to contribute to your Roth IRA and let compounding—when your contributions generate returns—work its magic until you need to take a withdrawal. But if you need to take distributions from your Roth IRA, that's okay too. Even if you withdraw your contributions, that money generated tax-free earnings while it was invested in your account. And those earnings will be yours to withdraw (also free and clear) when you're retired.

However, you'll still be subject to IRA annual contribution limits, so you can't "replace" the money you withdrew and contribute the maximum amount to your IRA in the same contribution year.

 

What’s next?

Roth IRA owners
Save as much as you can, and keep your contributions invested for as long as you can. Even if you need to tap into them, you’re still saving for retirement.

Don't have a Roth IRA yet?
Learn more about Roth IRAs. Then open an account to see for yourself why so many investors love them.

Open your Roth IRA

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*Withdrawals from a Roth IRA are tax-free if you’re age 59½ or older and have held the account for at least 5 years; withdrawals taken prior to age 59½ or 5 years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate 5-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.) The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the Roth IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you’re under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you’re required to keep track of the 5-year holding period for each conversion separately.

 

All investing is subject to risk, including the possible loss of money you invest.

You may wish to consult a tax advisor about your situation.