You know the old adage – ‘there’s no time like the present’. This is a noteworthy saying that is particularly true for young individuals and families who want to start saving seriously for the future. But how and where do you start? Here are five compelling reasons to start with a Roth IRA.
- A Roth IRA grows tax-free: Unlike its close cousin, the Traditional IRA, a Roth IRA is funded with after-tax dollars and grows absolutely tax free – providing tax-free income for you in retirement. The earlier you open and fund a Roth IRA the better off you’ll be, as this allows more time for compounding growth in your tax-free account. Another tax perk – saving dollars into your Roth IRA could make you eligible for the Saver’s Credit.
- A Roth IRA has flexibility: The Roth IRA is the most versatile retirement account available. Unique from its peers, a Roth IRA always allows you to take out your contributions without incurring tax or a penalty. Although you want to shy away from taking distributions of earnings, the IRS considers distributions from your Roth IRA as ‘principle’ first – allowing tax and penalty-free access to all of your Roth IRA contributions. Although the goal is to avoid taking distributions from your Roth IRA prior retirement, the flexibility to do so will play to your favor if you ever find yourself in a financial pinch.
- A Roth IRA for your first home: If your account has been opened for at least five years, you can withdrawal up to $10,000 to go toward a first-time home purchase. The IRS deems this a qualified distribution and allows you to take out both contributions and earnings without having to pay tax or a penalty – allowing you to use even your earnings tax and penalty free.
- A Roth IRA is controlled by you: It might seem silly to say a Roth IRA is fully owned and controlled by its owner – however the same is not true with other qualified retirement accounts. For example, a Traditional IRA is partly ‘owned’ by the government because you still owe taxes on those dollars. This ‘ownership’ gives the government a say in when you take distributions and how much you must take. These are called Required Minimum Distributions (RMDs). However, a Roth IRA already paid its taxes and RMDs are not required – giving you complete control over the timing and amount of your distributions.
- A Roth IRA for future generations: When someone inherits a Traditional IRA, they also inherit the tax problem of the IRA. For every dollar taken out of an inherited IRA, the beneficiary will pay tax at their ordinary income rate. Since taxes were paid up-front on Roth IRA contributions, the tax problem doesn’t exist on the back end. Not only does the beneficiary inherit a tax-free account, but it has potential to continue growing tax free during their lifetime.
So, if you currently have earned income, and that earned income does not exceed the IRS income phaseout limits for making Roth IRA contributions, you can tap into the benefits of this retirement savings vehicle. You can contribute the greater of your earned income amount or $5,500 for 2017 ($6,500 if over age 50). If you are someone who wants to start saving seriously for the future – and if you’re allowed to take advantage of all a Roth IRA has to offer, consider opening your Roth IRA account today. After all – there’s no time like the present.
David Kern is a Wealth Management Advisor at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
