The Top 3 Reasons You Should Open a Roth IRA

There are plenty of ways to invest your money, and a Roth IRA is just one tool you as an investor can use to help you reach your financial goals.

Income limits and contribution limits don’t make Roth IRAs the place where you can park and grow all your money, but they do allow you to diversify the types of investment accounts you hold.

  • In 2019, income limits on Roth IRA contributions will go up by $2,000 for singles from $120,000 in 2018 to $122,000 in 2019. They will increase by $4,000 for married filing jointly from $189,000 in 2018 to $193,000 in 2019.
  • Contribution limits will rise to $6,000 annually ($500 more than $5,500 contribution limit in previous years).
  • And, while you are not allowed to contribute to a Traditional IRA once you reach the age of 70 ½, there are no age limits on Roth contributions.

There are many reasons to like Roth IRAs as a wealth building tool, but here are the top three reasons I recommend these types of accounts for my clients.

1. Tax Diversification

I am all about tax strategy. An investment strategy that lacks a tax strategy component is incomplete. Roth IRAs are tax-free investment accounts. They are funded with after-tax dollars, so you pay taxes on the principal amount you invest and that’s it. Your money then grows tax-free and your distributions in retirement are tax-free. You do not pay taxes on the growth of your money.

When you have a traditional IRA or 401(k) that is tax-deferred, meaning you will pay taxes once you start taking distributions in retirement, it’s a good idea to have some investments that aren’t taxed like a Roth IRA. Having different retirement accounts that are treated differently from a tax standpoint can help to reduce your overall tax liability later in life. It can also allow you to use different buckets of money for different purposes.

For example, we will all likely live through several future tax environments. Many don’t recall this, but the highest marginal tax brackets historically in the US have been over 90%! Should such an onerous tax be passed again in the future, you’d have the ability to draw tax-free income from your Roth IRA, thus avoiding losing all but 10% of your distributions.

2. No Required Minimum Distributions (RMDs)

Unlike your traditional IRA or 401(k), you aren’t required to take distributions. This means that if you don’t need the money in your Roth IRA, you can leave it alone to continue growing until you do. On a fixed income, it’s a nice option to have tax-free money set aside for when you actually do need it or want to spend it.

If you never wind up needing to use the money you save in your Roth IRA, you have the option of leaving tax-free money to your children or other beneficiaries. Unused Roth IRA assets can then fold into your overall estate and legacy plan.

3. Access to Your Contributions

A somewhat lesser known fact about Roth IRAs is that you can access your contributions at any time without penalty after you’ve had the account for five years. It’s only when you touch the growth of your portfolio that you would be hit with a 10% penalty, but otherwise, you still have access to the funds you contributed.

You don’t have to justify a reason for pulling out the original contribution amount you need. It is your money. And the growth remains in the account and continues to grow.

Conclusion

Most of the reasons to use a Roth IRA center around its tax flexibility and advantages. Having money grow tax-free is attractive and being able to leverage the tax-free option in retirement so that you can minimize your taxable income is also advantageous.

With any investment decision, it’s important to remember that no solution is a one-size fits all approach. Your personal situation and circumstances dictate how and if a Roth IRA is the best option for you. Therefore, be sure to consult with a fiduciary financial advisor if you have questions about your investments. If you are interested in working with me individually, let’s explore that possibility together. You can get started working with a fiduciary financial advisor right here.