One word sums it up; flexibility.
PLAN A: A Long, Secure Retirement. A Roth IRA is unique among retirement plans in that it does not require you to make required minimum distributions. Other retirement plans generally require you to start making withdrawals at age 70.5. Every year you will be required to take a greater percentage of taxable withdrawals, gradually reducing your rate of tax-free compounding. As life expectancies continue to grow, having your Roth IRA earnings compound deep into your later years makes a great hedge against the possibility of outliving your assets. Additionally, if you are 70.5 or greater and have earned income, you can still make new contributions to a Roth IRA. If you pass away before you spend your Roth IRA, your heirs will be happy to inherit it tax-free.
PLAN B: Tax-Free Retirement Income On-Demand. Who doesn't enjoy tax-free income? The big selling point of Roth IRA's is that withdrawals from the account may be tax free, as long as they are considered qualified. Watch out for the rules, limitations and restrictions may apply. Withdrawals prior to age 59.5 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Whether it’s covering your monthly bills or a large one-time expense like a new car or home renovation, it will feel good to have your Roth IRA.
PLAN C: Alternative funding source. The primary goal of a Roth IRA should always be retirement savings, but real life finds a way to make things interesting. A wide range of life events both good (entrepreneurial opportunities, education, etc.) and bad (disability, unemployment, etc.) may force you to change your plan up. We see people make unplanned early withdrawals all the time, and it's a shame to see them penalized (typically a 10% tax penalty). Since the money you contribute to a Roth IRA has already been taxed, you are able to withdraw the amount of your contributions penalty free should a need arise. If you withdraw more than your contributions before you are eligible, it will be taxable earnings and possibly subject to a 10% penalty (some exceptions apply).
While I love Roth IRA's, they are not the best choice for everyone. Some questions you should ask yourself;
- Does my employer offer matching contributions?
- Is my tax rate going to be lower when I'm retired?
- Do I have “earned” income?
- Do I have enough money in my emergency fund?
- Am I eligible? (see our IRA eligibility calculator)
If you have at least $5,000 to start a Roth IRA, consider our awesome new Guided Wealth Portfolio platform featuring the best of technology and human insight. Learn more about it here and receive a free investment proposal.
For help deciding if a Roth IRA is right for you, please contact us today.
*CPA services and individual tax advice are not provided by Albidress Financial or LPL Financial. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. The Roth IRA offers tax deferral on any earnings in the account. For more information on Roth IRA's, please visit