8 key benefits of a Roth IRA
At a glance:
A Roth IRA is a type of individual retirement account that’s funded with after-tax money. Roths offer tax-free growth and tax-free withdrawals in retirement. However, there are many considerations and benefits to a Roth, including eligibility.
A Roth IRA can offer versatility and tax-efficiency when saving for retirement. If you don’t have a Roth IRA, here are 8 reasons to consider opening one today:
One of the benefits of a Roth IRA is that the money you invest in a Roth IRA grows tax-free, so you don’t have to worry about reporting investment earnings—the money your money makes—when you file your taxes. By comparison, if you invest in a nonretirement account, your earnings are subject to federal, state, and local taxes each year.
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 retirement income won’t be affected. This is a valuable benefit because your income affects how much you pay in taxes—including the taxation of Social Security benefits—as well as Medicare Parts B and D premiums.
Unlike a traditional IRA, a Roth IRA has no lifetime required minimum distribution. You’re eligible for tax-free and penalty-free early withdrawals on what you’ve contributed at any time. But, if you’re under age 59½ and you withdraw earnings on your contributions, you may be subject to taxes and withdrawal penalties on that amount. It's smart to contribute to your Roth IRA and let compounding—when your contributions generate returns—work its magic. But if you need to take distributions from your Roth IRA, that's okay too.
Even if you withdraw your contributions, that money generated 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.
Investors who make eligible contributions to an employer-sponsored 401(k), Roth IRA, or other retirement fund, may qualify for the Retirement Savings Contribution Credit, or Saver’s Credit. Eligibility depends on a number of factors, including your adjusted gross income and how much you’ve contributed to your Roth IRA or other retirement plan.
If your income is too high for a Roth IRA, you could get into a Roth through the “back door.”
To use this strategy, you’d make non-tax deductible contributions to a traditional IRA—which has no income limits. Then you’d move that money into a Roth IRA using a Roth conversion. You may want to consult you financial advisor and tax professional to understand the tax consequences before making a move because a Roth conversion is permanent.
The people who inherit your Roth IRA—your beneficiaries—will have to take RMDs (required minimum distributions), but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years. We can help guide you through the process, but seek the advice of your financial advisor if you have any questions.
You don’t have to think IRA versus 401(k). You may be eligible to contribute to both, as long as you’re qualified and heed the contribution and income limits. Combining these plans may set you up for more wealth in retirement, and that’s good news.
Another benefit of a Roth IRA is that you have lots of investment choices. For example, at Vanguard, you can choose from our broad range of low-cost mutual funds and ETFs (exchange-traded funds), as well as individual stocks and bonds and funds from other companies.
Roth IRA owners
Save as much as you can and keep your Roth IRA 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.
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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.
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