1. You get tax-free growth
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 anonretirement account, your earnings are subject to federal, state, and local taxes each year.
2. You can take 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 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.
3. You decide when, if, and how to take withdrawals
Unlike a traditional IRA, a Roth IRA has no lifetimerequired 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 toIRA 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.
4. You may qualify for additional tax credits
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.
5. You may be eligible for a “backdoor Roth IRA” conversion
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.
6. Your beneficiaries won’t be taxed
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.
7. You may be eligible to invest in both a Roth IRA and a 401(k)
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.
8. Choose from a wide variety of investment options
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.
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1. Tax-Free Growth: One of the fundamental advantages of a Roth IRA is the tax-free growth it offers. Unlike traditional retirement accounts, the money invested grows without being subject to federal, state, and local taxes each year. This tax advantage provides a significant boost to the overall returns on investment, allowing individuals to accumulate wealth more efficiently.
2. Tax-Free Withdrawals in Retirement: For those aged 59½ or older with a minimum of 5 years of account ownership, the ability to make tax-free withdrawals from a Roth IRA in retirement is a powerful benefit. This feature ensures that retirees can access their contributions and earnings without incurring penalties or additional taxes, providing flexibility in managing retirement income.
3. Flexible Withdrawals: The absence of a required minimum distribution (RMD) in a Roth IRA sets it apart from traditional IRAs. This flexibility allows account holders to decide when, if, and how much to withdraw, providing control over their retirement income strategy. Additionally, the option for penalty-free early withdrawals on contributions adds further flexibility.
4. Additional Tax Credits: Contributors to employer-sponsored retirement plans, including Roth IRAs, may qualify for the Retirement Savings Contribution Credit. Eligibility is contingent on factors such as adjusted gross income and contribution amounts. This credit serves as an additional incentive for individuals to save for retirement.
5. Backdoor Roth IRA Conversion: High-income individuals who are ineligible for a direct Roth IRA contribution can explore the "backdoor" Roth IRA conversion strategy. By making non-tax-deductible contributions to a traditional IRA and subsequently converting it to a Roth IRA, individuals can access the benefits of a Roth despite income limitations.
6. Tax-Free Inheritance: Beneficiaries inheriting a Roth IRA enjoy the advantage of tax-free withdrawals, provided the account has been open for at least 5 years. This feature ensures that the wealth passed on to heirs remains intact and accessible without the burden of federal income taxes.
7. Dual Eligibility for Roth IRA and 401(k): Individuals may qualify to contribute to both a Roth IRA and a 401(k), maximizing their retirement savings potential. Adhering to contribution and income limits allows for a diversified approach to retirement planning, potentially leading to increased wealth in retirement.
8. Diverse Investment Options: A Roth IRA provides a wide array of investment options, including low-cost mutual funds, ETFs, individual stocks, bonds, and funds from various companies. This flexibility empowers investors to tailor their portfolios to align with their risk tolerance, financial goals, and investment preferences.
