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Jun 27, 2024

8 Roth IRA benefits to consider

By Team Stash
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An illustrated hand is shown holding a sprouting plant, alluding to the concept of how to start a Roth IRA.

Are you looking for a tax-advantaged retirement account that comes with some unique advantages? You might want to consider a Roth IRA. Benefits like tax-free growth, tax-free withdrawals in retirement, and the ability to withdraw contributions penalty-free at any time make Roth IRAs an appealing option for many long-term investors. If you’re ready to embark on a retirement savings journey or add another dimension to your retirement plan, this guide will walk you through the Roth IRA benefits you could take advantage of. 

Here’s what we’ll cover:

What is a Roth IRA?

First things first: some definitions. A Roth IRA is a tax-advantaged individual retirement account that allows you to invest after-tax dollars, and then withdraw your earnings tax-free in retirement. IRA stands for individual retirement arrangement or individual retirement account. The Internal Revenue Service (IRS) offers tax benefits for these retirement plans to encourage people to save for their golden years. 

Here’s an overview of how a Roth IRA works:

  • You contribute after-tax money, up to the annual limit set by the IRS. Note that the IRS sets income limits for Roth IRAs that may reduce how much you can contribute or disqualify you from contributing.
  • You invest your Roth contributions in assets such as stocks, bonds, and funds. Your money enjoys tax-free growth while in the account.
  • Once you turn 59½, you can withdraw your Roth IRA earnings tax-free as long as the account has been open for five years.
  • You can take tax-free withdrawals of your contributions at any time, but you’ll incur taxes and penalties if you withdraw your earnings early.  

As long as you have earned income and don’t exceed the IRS income limit for the year, you can make a Roth contribution. There are no required minimum distributions, meaning you can keep money in your account as long as you like, and even pass it down to your heirs; this is a key Roth IRA benefit for people investing to build generational wealth.    

Roth IRA vs. traditional IRA

There are two types of IRAs: Roth and traditional. They both function in similar ways, have the same general contribution limits, and offer tax advantages. But there are different contribution restrictions, tax regulations, and required minimum distribution rules. Before you decide which is right for you, you’ll want to understand their key differences. 

Roth IRATraditional IRA
Income limitsContributions limited based on income and filing statusNo restrictions
Taxes on contributionsContributions made with after-tax moneyContributions made with pre-tax money
Taxes on earningsQualified withdrawals are tax-freeQualified withdrawals are taxed as income 
Tax deductionsContributions are not tax-deductibleContributions are usually tax-deductible
Early withdrawal rulesNo penalty for withdrawal of contributions; taxes and penalties for withdrawal of earningsTaxes and penalties for withdrawal of contributions and earnings
Required minimum distributionsNoneRequired starting at age 73

The biggest difference between traditional and Roth IRAs comes down to when you pay taxes on your money:

  • With a traditional IRA, you contribute pre-tax money; you pay income tax on the contributions and earnings when you withdraw it in retirement. You can generally use your contributions as a tax deduction, reducing your taxable income for the year in which you contribute.  
  • A Roth IRA is the opposite: you pay income tax on your money before you contribute to the retirement account; that’s why you can withdraw those contributions anytime without penalty. After age 59½, you can take tax-free withdrawals of both your contributions and earnings.  

Roth IRA benefit #1: Tax-free growth

Yes, you will pay taxes before contributing to your Roth IRA, and you don’t get a tax deduction for contributing. But the good news is that your money will grow tax-free in your Roth account. How? Paying income tax on contributions up front + Letting your money compound in the account + Paying no taxes when you withdraw your earnings after age 59½ = Tax-free growth.

Roth IRA benefit #2: Tax-free withdrawals in retirement

As mentioned, Roth IRA qualified withdrawals are income tax-free after age 59½. The benefit? You don’t have to spend any more of your hard-earned retirement savings on taxes, and your Roth IRA earnings are totally tax-free. That can be a game-changer when you’re living on a fixed income. 

Roth IRA benefit #3: No required minimum distributions

Required minimum distributions (RMDs) are the minimum amounts you must withdraw from an IRA each year, unless you have a Roth IRA. While a Traditional IRA requires you to take minimum distributions starting at age 73, a Roth IRA allows you to leave your money untouched as long as you like. That means your money can continue to compound as long as you choose.

Roth IRA benefit #4: Potential savings on income tax long-term

Paying income tax on your contributions before you invest in a Roth IRA might reduce the income tax you pay overall. In general, younger investors are more likely to be in a lower tax bracket now than they will be as they approach retirement age. So if you pay income tax on your Roth IRA contributions now (while you’re paying a lower tax rate), rather than making contributions later (while you’re in a higher tax bracket), you could end up paying less in taxes overall. 

Added bonus: Because you don’t have to pay income tax on qualified Roth IRA withdrawals in retirement, your taxable income won’t increase when you withdraw from your account as a retiree. And that could prevent you from being pushed into a higher tax bracket in retirement. Also note that if you’re in a lower tax bracket now than you plan to be when you near retirement, it could be beneficial to max out your Roth IRA if you can afford to.

Roth IRA benefit #5: You can also have a 401(k)

If you have an employer-sponsored 401(k), you can also have a Roth IRA. Maintaining these complementary retirement savings arrangements could help you put more money toward your retirement savings and give you the benefit of two different kinds of tax breaks. Your 401(k) provides an immediate tax deduction, since contributions are made with pre-tax dollars, and your Roth IRA offers a break in the future since you’ve already paid taxes on your contributions and your earnings are tax-free. 

Note that 401(k) plans come in different varieties, including both traditional 401(k)s and Roth 401(k)s. The terminology can be confusing: a Roth 401(k) is not the same as a Roth IRA. A Roth 401(k) is an employer-sponsored retirement plan funded with after-tax dollars, but contributing to it doesn’t impact your ability to contribute to a Roth IRA as well. 

Roth IRA benefit #6: No penalty for contribution withdrawals

Nobody likes a penalty, so it’s a good thing the Roth IRA lets you withdraw contributions at any time without penalty or tax. This rule only applies to contributions, which means the after-tax money you put into your Roth IRA. Early withdrawals of earnings, aka your investment income or profits, are usually subject to income tax and/or a 10% penalty depending on your age and how long you’ve held your account.

Of course, withdrawing your contributions won’t help you reach your retirement plan goals, so it may not be advisable to take money out of your account, even if there’s no penalty. But the flexibility of tax-free withdrawals for contributions is one Roth IRA benefit many people appreciate if they’re worried they may have to dip into their nest egg early. 

Roth IRA benefit #7: No taxes for your beneficiaries

Considering your estate planning? Rest assured that your Roth IRA money can be passed along to your designated beneficiaries tax-free after your death. While your heirs will likely have to take required minimum distributions, contribution withdrawals won’t be subject to federal income tax. And as long as your account has been open for at least five years, neither will earnings withdrawals. People who are investing for their children’s futures may leverage this Roth IRA benefit so their kids enjoy tax benefits on their inheritance. 

Roth IRA benefit #8: Multiple investment options

Flexibility and autonomy with your investment decisions are built into your Roth IRA because it offers you more control over how and where you invest your money. A 401(k) plan typically limits investment options to a handful of funds or company stock, chosen and managed by the retirement plan’s administrator. With a Roth IRA, you have the freedom to invest in stocks, bonds, mutual funds, ETFs, money market funds, CDs, and more. Multiple Roth IRA investment options help you diversify your portfolio and pursue the investment strategy of your choosing. That’s not to say that a Roth IRA is necessarily better than a 401(k); it’s just more flexible. 

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Roth IRAs and your retirement plan

It’s never too early to start retirement planning. The sooner you start investing, the more time your money has to grow. And with a Roth IRA, you can enjoy tax-free growth on the money you put away for the future. But it doesn’t have to be your only retirement account; you can also have a traditional IRA, an employer-sponsored plan, and even a brokerage account.

As you consider your options, calculate how much money you’ll need to retire so you can set a goal for your retirement plan. Then you may want to learn how to start investing and determine how much of your income you should invest. That information can help you set a strategy for building your retirement funds over time and decide if a Roth IRA’s benefits make it a good thing to invest in for your particular goals. 

Invest for the future now to enjoy Roth IRA benefits

The future will be here before you know it, so make a plan to enjoy it. Investing for retirement is a long-term commitment. Depending on how far you are from leaving the workforce, your Roth IRA investments may have many decades to grow; over the course of 20, 30, or 40 years, the advantages of tax-free growth can really add up. Starting a Roth IRA is a fairly simple process. And if you invest with Stash, you can get started with any amount, so you don’t have to wait to begin building wealth for your future. 

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Team Stash

Stash does not monitor whether a customer is eligible for a particular type of IRA or a tax deduction. Clients should consult with a tax advisor.
Roth IRA: Withdrawals of the money (Contributions) you put in are penalty and tax free. Prior to age 59½, withdrawals of interest and earnings are subject to income tax and a 10% penalty. All earnings are tax free at age 59½ or older, assuming your first contribution was more than 5 years prior. Income Eligibility applies.
Traditional IRA: Withdrawing prior to age 59½, generally means you’re subject to income tax and a 10% penalty. Withdrawals after age 59½ are only subject to income tax but no penalty.
While you can fund both an IRA and 401(k) in the same year, some income limits could apply.

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