Retirement accounts have the potential to make a significant difference in terms of long-term savings and investing. There is no such thing as a typical retirement account, they all come with certain benefits. A Roth IRA, for example, is one of them — and it can be an excellent source of money in retirement if utilized correctly. You should open a Roth IRA if you haven’t already done so. Here are three reasons why you’ll thank yourself later if you do.
1. You may eventually be ineligible
For 2022, the highest amount that can be contributed to a Roth IRA is $6,000 (or $7,000 if you’re 50 or older). Unlike a traditional IRA or 401(k), not everyone can contribute to a Roth IRA due to its income restriction. If you are single and have a gross income under $129,000, you may contribute up to the maximum. Married couples who are filing jointly must earn under $204,000 in order to make full contributions.
The amount you can contribute to a Roth IRA phases out when your income hits $144,000 (214,000 if you are married and filing jointly), after which it is no longer available. At some point in your career you may go over the income limits for Roth IRA contributions. Because of its superior tax benefits, you’ll be glad you took advantage this while you had the chance.
2. Money grows tax-free
When it comes to choosing between a traditional IRA and a Roth IRA, the most common question is: when do you want your tax cut? Because you put after-tax money into a Roth IRA, you may take tax-free withdrawals during retirement. When you take 401(k) or typical IRA withdrawals during retirement, on the other hand, you’ll have to pay income taxes on that amount.
You should pay taxes on any money that you expect to be taxed at a higher rate when you retire, since this will ensure that it grows and compounds tax-free. It’s important to be able to have your contributions rise and compound tax-free so you can save thousands of dollars in retirement if you take withdrawals. Imagine if your 401(k) allowed you to accumulate $1 million. Even at the lowest possible tax rate — 10% — that is still $100,000 taken away from your savings account.
3. There are no required minimum distributions
One of the greatest features of a Roth IRA is that there are no required min distributions (RMDs). An RMD is the amount that must be taken out of a retirement account, like a traditional IRA or 401(k), each year. You must take your initial RMD by April 1 following your turning 72 years old. If you turn 72 on June 1, 2022, you must receive your first RMD by April 1, 2023.
Because you don’t have to take RMDs from a Roth IRA, you may choose not to withdraw funds from the account and allow it to grow and compound. Even if you never take withdrawals, it can be passed on to a beneficiary after your death. If you invest $500 each month for 25 years with a 10 percent annual return, the difference between allowing it to grow for 25 years rather than 30 is over $396,000.