5 Reasons the Roth IRA Is Still a Great Retirement Vehicle
If there is one thing married retirees know, it is the importance of communication. While discussions about money may have faded into the background because of children and other life choices, you can no longer avoid fiscal conversations because neither spouse is working.
Instead of catering to avoidance and blissful ignorance, embrace the challenge and small level of discomfort. Your relationship will be stronger for open communication, and you will both appreciate the transparency.
Tax-Free Withdrawals in Retirement
When you contribute money to a traditional IRA, you can deduct those contributions from your income tax return for that year. However, when it's time to withdraw money from your IRA in retirement, you have to pay income taxes on those funds.
In contrast, while contributions to your Roth IRA are not immediately tax-deductible, you can withdraw the funds when you retire without paying a cent in additional taxes. This is an especially attractive benefit if you expect to be in a higher tax bracket at age 65 and older than you are now, which is the reality for many young investors.
Another key tax benefit? Both types of IRA accounts also grow tax-free, which means you never have to pay income tax on interest and dividends earned.
Diverse Investment Selections
A Roth IRA gives you access to a wide range of investment types. You can designate your funds for bonds, stocks, mutual funds and exchange-traded funds. If you decide to open a self-directed IRA so you can guide your own investment decisions, you can also expand your portfolio to include peer-to-peer loans, real estate, precious metals and commodities. Roth IRAs only limit you from investing your funds in artwork, collectibles and life insurance.
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Lack of Required Minimum Distributions
The IRS requires taxpayers to take a required minimum distribution from traditional IRAs, employer retirement plans such as 401ks, and SEP and SIMPLE IRAs. Once you turn 72, you must withdraw a certain amount annually to avoid tax penalties. The RMD varies based on your income and other factors.
With a Roth IRA, you do not have to take a lifetime required minimum distribution. If you plan to transfer your wealth to future generations, you can do so with this type of investment vehicle without depleting the balance for your children and grandchildren.
Most people qualify to open a Roth IRA. For 2021, you are eligible for this type of investment if your modified adjusted gross income is less than $140,000. If you are married, you and your spouse must have a shared MAGI of less than $208,000. What's more, the Roth has no age restrictions for contributions. The traditional IRA prevents you from making further contributions after you reach 70 years and six months of age.
Fewer Age Restrictions for Withdrawals
Consider opening a Roth if you're dreaming of early retirement. With the Roth IRA, you can begin taking tax-free withdrawals at age 59 years and six months.The Roth IRA also makes sense if becoming a first-time homebuyer is on your list of short-term goals. Investors younger than the withdrawal age can use up to $10,000 from this account for a first-time home purchase without the typical tax penalties for early withdrawal.You can make contributions to either a traditional or Roth IRA for 2020 until April 15, 2021. If you are younger than 50, you can set aside up to $5,500 per year in 2021; for the 50-and-older crowd, the maximum rises to $6,500.
If you've decided a Roth IRA is right for your retirement savings, you can open this account with a traditional brokerage firm or with a roboadvisor app for set-it-and-forget-it contributions. Just plan your annual transfer and watch your funds grow.