Roth Individual Retirement Accounts or Roth IRAs are often pitted against traditional IRAs in ascertaining which the better investment option for one’s retirement is. Unlike traditional IRAs, a Roth account is where an individual pays taxes on the contributions and enjoys tax-free withdrawals later. There are arguments in favor of both types of retirement funds though you will find, Roth IRAs typically win more supporters. And there several reasons for the same; read on to find out more!
You Pay Your Tax Bill In Advance
When making contributions to a Roth IRA, you’re contributing funds that have already been taxed. This has immense value for people who are slotted in low tax brackets. In the circumstance that they increase earnings and transition to a higher tax bracket, or even when the tax is raised since your taxes on contributions have already been paid, you won’t have to pay higher taxes later with an increase.
Your Withdrawals Post-Retirement Become Tax-Free
Those who withdraw their contributions post their retirement, do not have to pay tax on the distributions. However, this is allowed only once the account holder is over the age of 59.5 years and the account is over five years old. With traditional IRAs and 401(k)s, distributions are not tax-free, and the beneficiary has to pay income tax on each withdrawal.
The Investment Growth Is Tax-Free As Well
Whatever investment gains or interest earnings you collect with your Roth IRA are non-taxable as well. If the account holder chooses not to withdraw funds before 59.5 years and begins collecting distributions post this age and when the account is at least five years old – there will be no need to pay income tax on the investment earnings from your Roth IRA.
You Have More Flexibility With Your Funds
With a Roth IRA, the original account owner is at freedom to make withdrawals or leave his investments to grow through the course of his lifetime. With other types of retirement accounts such as 401(k)s and traditional IRAs, you need to make withdrawals annually as a rule, after the age of 70.5 years; otherwise, a penalty is charged. With Roth IRAs, your savings can grow throughout your life, and that too tax-free.
Accessing Invested Money Before Retirement Is Easier
Having a Roth IRA also affords you the convenience of making withdrawals before the age of 59.5 years. The penalty changed for the same is a paltry 10% alongside income tax levied on the investment earnings component of the withdrawal amount. In some instances, early withdrawals may be penalty free too, and there is a list of criteria which makes you eligible for it.
Roth Inheritance To Heirs Also Becomes Tax-Free
Roth IRAs are a good deal not just for the account holder but their nominated beneficiary and heir too. With other kinds of retirement accounts like traditional IRAs or 402(k)s, the one receiving the inheritance has to pay taxes on the estate left to them. If you’re a Roth IRA holder, however, the beneficiaries will enjoy tax-free withdrawals on their inheritance.
Such IRAs Maximize Tax-Sheltered Assets
The logic here is simple. With traditional IRAs and 401(k)s, all your money is not completely your’s since you still owe taxes on it. But with Roth IRAs, the taxes are prepaid using money apart from what goes into your retirement accounts. This gives you a vaster wealth of tax-sheltered assets to spend once you retire. More free assets, lesser worries!
The Contribution Limit With Roth IRAs Is Relatively Higher
Roth IRA holders can have a contribution up to $5,500 as of 2015. If the account holder is over the age of 50, the limit is even higher at $6,500 per year. And while with 401(k) accounts, the contributions must be filed by the end of the calendar year, with Roth IRAs, the deadline extends to the annual tax-filing deadline of April 15.
You can convert Traditional IRAs to Roth IRAs easily.
Most people are eligible to convert their traditional IRA assets to a Roth IRA, as long as they are ready to shell out due income tax on the amount that is converted. If you are in a low tax bracket, going forth with the conversion may be particularly beneficial when the tax levied is lower. You also have the option of converting a small amount of traditional IRA assets to Roth if you do not want to incur a huge tax bill.
Roth IRAs allow you access to saver’s credit
Roth IRA assets can qualify you for receiving saver’s credit too, provided your annual income falls below a specified amount. In fact, you may be eligible for a tax credit of 10 – 50% of the amount contribution, though there is an upper limit to the amount that may be received.