Saving for the future can be a daunting task if you are unsure where to start or what the advantages of each type of saving can do for you. Let’s take a minute to look at the advantages of a Roth IRA.
A Roth Individual Retirement Account (IRA) is an account you open and manage on your own versus your employer holding it for you. You contribute after tax dollars that then grow tax free throughout their lifetime. This is perfect for new savers. Some of the reasons why are listed below:
- If you are young and just starting out, you are more than likely in a lower tax bracket than you will be later in life. This means that your money could potentially only EVER be taxed at 15%-25%.
- Distributions of contributions are always tax free, no matter when they are made. This means that if you are age 59 and under, you can withdraw any amount up to the amount you put into the Roth IRA, tax- and penalty-free. For example: you put $5,000 into your account in 2014 and in 2017 something comes up and you need $2,000 extra dollars. You can pull that money out without any repercussions.
- Distributions can be made completely tax free, as long as they are qualified distributions. Generally, these include distributions made after the owner has attained age 59½, died, or become disabled and held more than five years after a Roth conversion. There are also tax free distributions for certain special purposes, including the purchase of a first home. This is a great way to help you grow your savings and a potential option to put a down payment on your first home.
- No lifetime distributions are required, so the tax-free buildup can continue throughout the owner’s life.
- An individual can make contributions to a Roth IRA regardless of age. (There are other limitations, so be sure to talk to your professional tax advisor.)
To sum everything up, you only get taxed once on your money; the earlier you start saving the more you save (in the sense that you have more time, but also because you could be in the lowest tax bracket you will ever be in thus saving on taxes); distributions in the amount up to your contributions are tax and penalty free and there is no limit as to when you have to stop saving for your future.
Meghan M. Scott, EA