A Roth IRA is one of the best retirement accounts with unique tax benefits. With this plan, your contributions will come from after-tax wages but you will grow your account tax-free. One of the biggest benefits of a Roth IRA is that you withdraw your money tax-free, the account does not require RMDs, and you can transfer the account to your descendants tax-free.
Here are the top 8 benefits of a Roth IRA you should know.
What are the benefits of a Roth IRA?
Before you open a Roth IRA, you need to know if the account is right based on its benefits. This article will be your complete guide on what to expect when you open a Roth IRA and its benefits.
Without further ado, here are the top 8 benefits of a Roth IRA you should know.
1. Contributions can be withdrawn at any time without a penalty
Your Roth IRA balance is made of contributions you make to the account and the return on investment you make on the account. Since you paid taxes on your contributions, you can withdraw this money at any time free of taxes.
However, any return on investment you made on the account can be taxed when you make unqualified distributions to the account. You must be at least 59½ and your contributions must be in the account for at least 5 years before you can withdraw the money from a Roth IRA free of the penalty and taxes.
The only way you can avoid this tax and penalty on premature distributions is by meeting the IRS early withdrawal exceptions. These exceptions include but are not limited to college expenses, birth or adoption expenses, first-time home purchases, and disability.
2. You can contribute to a Roth IRA at any age
One of the benefits of a Roth IRA is that there are no age requirements to open an account and make contributions. No matter how old you are, you can open an account and make contributions.
This is because eligibility to contribute to a Roth IRA is not based on age. Instead, your eligibility will depend on your modified adjusted gross income(MAGI) level and filing status.
The IRS has Roth IRA income limits for 2024 based on your filing status. If your income is higher than income limits in each range, you will not qualify to make a Roth IRA contribution in 2024.
| Filing status | Phase-out range |
| Single tax-payer and head of household | $146,000 and $161,000 |
| Married, filing jointly | $230,000 and $240,000 |
| Married, filing separately | $0 to $10,000 |
This table shows that if you are single or head of a household, you cannot contribute to a Roth IRA when your income is over $161,000. If you are married and filing jointly, you cannot contribute if your modified AGI is over $240,000. For income under $146,000 when filing single or $230,000 when married and filing jointly, you can make a full contribution. Incomes between within phase-out ranges, you will qualify for a partial Roth IRA contribution.
How much can you contribute to a Roth IRA in 2024?
The maximum contribution to a Roth IRA is the following:
- $7,000 if you are under 50, and
- $8,000 if you are 50 or older
For 2023, the Roth IRA contributions are $6,500 or $7,500 if you are 50 or older.
3. Roth IRA does not require RMDs
Employer-sponsored retirement plans such as 401(K), 403(b), or traditional IRA and traditional IRA-based accounts come with required minimum distributions (RMDs) when you reach the age of 73.
Failure to make these RMDs may result in a 50% excise tax on the portion you did not take out on time.
One of the best benefits of a Roth IRA is that RMDs are not required as long as you are the original account owner. Your descendants, however, are required to take RMDs and the account must be distributed within 10 years.
4. You withdraw your money tax-free
One of the best benefits of a Roth IRA account you should know about is that you do not pay income tax when you are taking money out. Paying no income tax is usually what makes a Roth IRA stand out among other retirement savings accounts.
While your Roth IRA distributions are tax-free, unqualified distributions might be subjected to tax. If you withdraw your money from your Roth IRA before you turn 59½ and have not owned the account for at least 5 years, you will pay tax on returns from the money you withdrew and a 10% penalty might apply.
6. Your descendants will inherit the money tax-free
There are many benefits of a Roth IRA. One benefit that you probably never heard of is that you can pass on your Roth IRA account to your heirs tax-free. Your descendants, however, will be required to take RMDs from the account to avoid penalties.
This is because RMDs are waived only when the account belongs to the original account owner. RMDs can also be waived if the heir is your spouse.
Beneficiaries of your Roth IRA account must liquidate the account no later than 10 years from the date you died. This rule, however, has some exceptions and the following are some of them, according to Vanguard.
- Your beneficiary is your spouse
- The beneficiary is qualified to be disabled by the IRS definition
- Your her is chronically ill
- The beneficiary is a minor child
- The account was inherited by someone who is not 10 years younger than you (the original owner)
7. Roth IRA comes with low fees
Retirement fees can easily erode your earnings and make it harder to build your nest egg. Unlike 401(k) plans which come with high fees, the Roth IRA comes with low fees which is one of the best benefits of a Roth IRA that most people don’t know about.
Due to higher competition among IRA providers, you can easily qualify for a Roth IRA with low fees. Additionally, there are many providers which makes it easy to shop around and pick cost-effective IRAs.
8. The Roth IRA comes with a wide variety of investments
One of the biggest benefits of a Roth IRA is that it comes with a wider range of investments. This is opposed to employer-sponsored accounts such as a 401(K) plan where you can only invest in what is inside the plan.
The Roth IRA gives you the option to invest in mutual funds, index funds, ETFs, individual stocks, REITs, and money market accounts.
Having flexibility and many investment options on your investments can help you grow the account much faster than 401(K).
More retirement tips
IRA contribution limits in 2024
What are the 401(K) fees and how to lower them?
