The Benefits of Roth IRAs

The Roth IRA was introduced in 1977 and has been used as a valuable tax-planning strategy  by many. Provided you follow certain guidelines, contributions you make to your Roth IRA can grow tax-free and withdrawals of your investment and earnings will not be subject to federal income tax as long as they are considered qualified. This is because monies you place into a ROTH IRA are after-tax dollars.

A Roth IRA can be an integral part of any retirement plan. Unlike a Traditional IRA which requires you to begin taking taxable distributions at age 72,  Roth IRAs have no required minimum distributions (RMDs). Therefore, if you don’t need to tap into your Roth in retirement, you can pass it on to your heirs’ tax free as part of your estate plan.

Roth IRA facts:

  • You must have earned income
  • Your AGI cannot exceed the IRS limitations
  • There is no maximum age for contributing
  • Spousal contribution rules apply

Should You Convert from a Traditional to a Roth IRA?

That answer depends on many factors such as your age at the time of conversion, your current and future tax brackets, and when you want to begin taking distributions.

Withdrawing Funds from Your Roth IRA

You can take money out of your Roth IRA at any time, but you are never required to do so. Your account can potentially grow until you need it, or if you don’t ever need it, you can pass it on to your heirs. They will need to follow the new rules under the SECURE Act for withdrawals, but the funds will still be tax free.

For tax purposes, withdrawals from your Roth IRA are paid out in the following order.

  • Regular contributions come out first, penalty and tax free
  • Converted funds, which have already been taxed, come out next, tax free. They are also penalty free provided these funds are withdrawn after the required five year period or if an exception applies (reaching age 59 ½, becoming disabled, using money for higher education expenses, etc.).
  • Earnings come out last. They are penalty free and tax free if withdrawn after the required 5 year period AND one of these four situations applies: you are over age 59 ½, disabled, withdrawing for a first time home purchase, or you have died.