Should i open a roth iRA?
Roth IRAs are a great retirement savings option for many people, particularly those who expect to be in a higher income tax bracket in retirement than they are now. If you are wondering if you should open a Roth IRA, here are 5 reasons why you should consider having a Roth as part of your retirement portfolio.
1) Tax-free Retirement Income:
The most significant difference between a traditional IRA and a Roth IRA is how each account handles taxes.
A traditional IRA offers you an upfront tax break. That means that whatever you contribute to your IRA up to the allowable amount for the tax year can be claimed as a deduction. That also means that the distributions for an IRA will be taxed as ordinary income. One of the biggest drawbacks of IRAs or 401Ks is that future tax rates are not guaranteed. With the growing national debt, chances are that income taxes will go up in the future. This is another reason why it is critical to include taxes when planning for your retirement.
Unlike a traditional IRA, the Roth version does not allow you to deduct your initial contributions from your taxable income. However, whatever you put into your account will grow tax-deferred and the amount of your distributions will be taken out tax-free. A Roth is subject to a 5-year rule, meaning that you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account.
Summary: A traditional IRA offers an upfront tax break, while Roth grow tax-free and withdrawals in retirement are tax-free as well.
2) No Required Minimum Distributions (RMDs):
The Roth IRA does not require distributions starting at age 72 like the traditional IRA requires.
3) Flexibility In Contributions And Withdrawals:
Roth IRA contributions can be made after the age of 72 as long as the account owner has earned income, but contributions are no longer allowed with a traditional IRA. Additionally, Roth IRA contributions (but not earnings) can always be withdrawn tax-free and penalty-free at any time, for any reason.
4) Estate Planning Benefits:
Because Roth IRA contributions are made after-tax, and Roth withdrawals are tax-free, they can be an excellent tool for estate planning. Roth IRAs can be passed down to beneficiaries, who would also be able to make tax-free withdrawals in retirement.
5) No Age Restrictions On Contributions:
There is no age limit to contribute to a Roth IRA as long as the account owner has earned income. Traditional IRAs do not allow contributions after the age of 72, even if the account owner has earned income.
If you’re committed to saving for your retirement, opening a Roth IRA is one way of accomplishing that goal. Most people do not consider future taxes when planning for retirement. However, we cannot predict how tax laws will change in the future. Unfortunately, the massive American debt combined with a historically low tax rate, may push taxes up in the future. So the combination of these factors make a Roth IRA an attractive option.
Our financial consultants can assist you in finding the right Roth IRA product and creating a financial plan tailored to your needs. One of the main reasons people fail to save enough for retirement is due to not having a financial plan. The process of creating a financial plan can take less than 20 minutes. So schedule an appointment with us today to get started. We will help you worry less about your finances and look forward to helping you accomplish your retirement goals.