Tax-free income during retirement is just one of many benefits that make a Roth IRA one of the best retirement accounts you can choose as an investment vehicle. Let’s look at the top 5 advantages of a Roth IRA.
A Roth IRA is a type of individual retirement account that is different from a Traditional IRA. The main difference is with a Traditional IRA you get a tax break now, but pay more tax when you retire. With a Roth IRA you pay your taxes now and pay less tax later or no tax if you hold your Roth IRA for at least five years.
Here are 5 of the top advantages of having a Roth IRA as your retirement account compared to other retirement vehicles.
You can receive tax-free income during retirement if you meet these two requirements: You have held your Roth IRA for five years and you have turned 59 1/2. If so, you can withdraw your earnings tax-free.
While you need to be 59 1/2 to withdraw your income tax-free, as long as you have earned income, there is no prerequisite age to make contributions.
However, there are contribution limits. If you are under age 50, four 2022, you can only contribute a maximum of $6000. If you’re over 50, the maximum is $7000.
To be eligible to contribute the maximum to a Roth IRA, the modified adjusted gross income for single filers must be less than $129,000, or under $204,000 for couples filing jointly.
With a Traditional IRA, you must take required minimum distributions beginning at age 72 based on your life expectancy as calculated by IRS actuaries. Roth IRAs do not have this requirement. You can keep the money in your account as long as you wish.
You can invest in a wide variety of stocks with a Roth IRA, allowing you flexibility over the types of investments you choose. This includes mid-cap stocks, small-cap stocks, international stocks, growth stocks, value stocks, and dividend stocks. You can also sell your stock assets without having to pay taxes on capital gains. For example, if you purchased a stock and it rose from $1000 to $2000 per share, you can sell that stock and purchase other assets with the money from your Roth IRA without having to report the transaction to the IRS, according to the Motley Fool.
As long as you’ve held the money in your Roth IRA for a minimum of five years, and because you’ve already paid taxes on your contributions, your heirs may be able to make tax-free Roth IRA withdrawals for a certain period of time. Learn more about what makes a Roth IRA a great generational-wealth strategy.