Why should people choose a Roth IRA?

ROTH IRA’s (Individual Retirement Account) are flexible retirement accounts for individuals who are looking for a tax advantage retirement savings vehicle.  There are many ways in which ROTH IRA’s can be more beneficial than traditional IRA’s. One being that the account owner’s money grows tax-free.  Also, there are no minimums to open this type of retirement account. It is like a traditional IRA because the maximum contribution is the same ($6,000 per year).   It differs from other investment accounts because the money in the account grows tax-free, and it can be withdrawn tax-free when you retire.  You may have both a traditional IRA and a ROTH IRA simultaneously, but your total max contribution in both accounts must equate to $6,000 or less each year. 

An overwhelming number of Millennials have been investing in ROTH IRA’s due to their tax-free properties.  ROTH IRA’s target individuals who make less than $124,000 per fiscal year; if you make more, you may not contribute to a ROTH IRA.  If you are married, your combined annual income must be below $196,000, to be able to contribute to a ROTH IRA.  For Millennials, this type of retirement account makes sense because those that are younger tend to be in a lower tax bracket.  The years of compounding tax-free earnings, along with tax-free withdrawals in retirement, far supersede the annual tax deductions from a traditional IRA account.  Additionally, ROTH IRA’s offer more flexibility because individuals can’t take a tax deduction in the same year when contributing to a traditional IRA. 

ROTH IRAs have several benefits regarding withdrawals and tax penalties. Just like a traditional IRA, one should not withdraw funds before age 60; although, you could in special circumstances because the ROTH has very flexible rules for qualified expenses.  In a ROTH, you can withdrawal any contributions without penalty.  ROTH IRA’s have special circumstances, called qualified distributions, when you can withdraw funds.  For example, if you are looking to purchase a first-time home, you can take up to $10,000 without incurring taxes.  Also, if you are looking to pay off student loans you may withdraw from your ROTH IRA contributions.  ROTH IRAs can give people the flexibility they need to retire, become a first-time homeowner, start a family, or pay off medical bills.  

ROTH IRA’s use after-tax dollars.  For example, income tax is paid on the money after income is earned from a salary, or any other taxable income; that money that has already been taxed goes into the retirement account.  Therefore, you will not pay a tax when you withdraw the funds in retirement – this could potentially be a huge benefit.  All this time your funds are growing, and compounding, tax-free. 

Not only are the withdrawal penalties significantly more lenient than a traditional IRA, but there is also no required minimum distribution.  Typically, in a traditional IRA, once the account owner becomes age 72, he or she is required to receive a distribution from the traditional IRA each year.  If you forget to take the Required Minimum Distribution (RMD), the penalty is very steep; the IRS will tax 50% of the amount of the RMD.  However, in a Roth IRA, the account owner can continue to make annual $6,000 contributions to the ROTH, without being required to receive a distribution at age 72. 

The flexibility of ROTH IRA’s make this type of retirement account ideal for Millennials, or individuals who make less than the salary cap of $124,000 per year.   

If you, or someone you know, has questions or concerns about your retirement account(s), please contact Schenley Capital. 

Written by Ellie Genter 
Schenley Capital, Inc. Associate 
Email: elliegenter@www.schenleycapital.com
Phone: 412-749-9256