Is a Roth IRA Right for You?

Sometimes when I focus so much on saving, I watch the numbers climb without thinking too much about the way I am saving it and whether there are better options. When planning how you will save money for retirement, it’s a good idea to consider your decisions carefully. One of the most common individual retirement accounts is the Roth IRA.

What It Is

A Roth IRA offers a considerable future tax advantage, granting a tax break when an individual withdraws money from the account during retirement instead of when money is placed into the account, which is the case for other retirement accounts including the traditional IRA and the 401(k). Individuals at any age who have earned income from a job within an annually adjusted salary range qualify, but may have to limit their contributions (however, contributions to a traditional IRA can be converted to a Roth, with taxes due). While you are hard at work and saving for your future, it’s a good idea to consider the benefits of the Roth IRA.

Tax Structure

There is no tax deduction for contributions made to a Roth IRA, and distributions are tax-free upon withdrawal. Though the benefits depend on the tax bracket an individual falls into now and upon retirement, compounded earnings reach the investor in the form of income in retirement. Unlike the traditional IRA, the Roth version allows savers to contribute after-tax money now and withdraw principal and earnings tax-free upon retirement.

Flexibility

Roth IRAs allow a selection of types of investments from stocks and bonds to certificates of deposits and more. They can also provide quick cash in a pinch. Contributions to this account can be withdrawn penalty-free at any time — though taking out earnings or growth can result in potential income taxes and penalties. This means a Roth IRA can act as a form of emergency fund. You can also use the money for some specific purposes without penalty. These qualified withdrawals for buying your first home, education expenses, disability and death to unreimbursed medical expenses and back taxes can be taken even if you do not meet the age or holding period requirement.

No Mandatory Withdrawals

Roth account holders are never forced to withdraw money — no matter their age or retirement status. There are absolutely no required withdrawals during the lifetime of the original owner of the Roth IRA, providing the potential to earn more interest and save further if you do not require the funds.

Benefits Your Heirs

Your beneficiaries can receive tax-free distributions of money left to them in a Roth IRA, which is different from the traditional IRA option, where heirs have to pay taxes on inherited funds. If you plan on leaving financial help for your kids and/or grandchildren, this fund can be used as a way to boost their future with tax-free income that can be stretched over a lifetime.

Late Contributions

Many account options place a limit at age 70 1/2 for making contributions. The Roth has no restriction on adding to your account as long as you are earning income. You can continue to contribute as long as you live and work.

The right retirement account for you is a personal process of education, comparisons and planning. It’s a good idea to consider the Roth IRA when making your decision, especially for Millennials, who have a long way to go before retirement.