Tuesday, May 21, 2024

Why the Roth IRA is Both a Beauty and a Beast for Investors

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The Roth IRA is a beautiful creation that works like a beast. Know the primary benefits of Roth ownership, and learn to let this account work for you. Here is the quick and dirty of the Roth IRA.

Why You Want One

A Roth IRA is purchased with income that has already been taxed. You can write this off the year you pay those taxes. The genius of the Roth IRA is that you don’t pay taxes on those funds ever again. You don’t pay taxes on the growth or the withdrawal. This is a wonderful long-term investment plan.

What you don’t know, because you aren’t paid to know, is that there are a whole host of ancillary benefits that ride the coattails of these beauties. So, if the first motivator I’ve offered to buy an IRA isn’t enough, here are some of the other beautiful features of this beast.

Related: How to Grow Your IRA From $5,500 to $204,345 With a Single Rental Property

Traditional verse Roth IRAs

First, your traditional retirement plan is subject to required minimum distributions.

With traditional IRAs, you have to take distributions. You also have to take tax on them from the time you reach 70.5 (seventy-and-a-half) years old. Roth IRAs, by contrast, can just keep growing.

Let me tell you a little bit about my friend Rhonda. She’s making enough money off of her aquarium supply business that she’d just as soon leave her money in the bank. She can keep accruing growth for a dream vacation, a luxury retirement condo, or even a nest egg to leave her family. Rhonda is married with two children, so one feature of her account will protect her loved ones in the event of an untimely death.

But That’s Not All

This leads to the next major benefit: A surviving spouse can keep feeding a Roth IRA or combine it with an existing Roth IRA. Rhonda’s husband would not reap this benefit from a traditional IRA account. A non-spouse beneficiary, like Rhonda’s daughter Rosie, cannot continue to grow the account. They can, however, delay the required minimum distributions. For five years, they can ride those tax-free returns.

As a second option, you can choose a lifetime expectancy distribution. Setting aside the morbid reality that this will require you to consider your own mortality, it will provide the best option for a non-spouse beneficiary who wants to keep as much money as possible in the Roth IRA (where it will continue to grow tax-free). This brings peace of mind to both Rhonda’s daughter, who hasn’t been as successful as her yet, and Rhonda herself. Death is inevitable, and nobody tells you when the Reaper is coming. However, you can certainly financially outmanoeuvre him.

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Related: Why You Need to Start Your IRA NOW…and Any Other Tax-Free or Tax-Deferred Vehicle You Can

Finally, Roth IRA owners are not subject to the 10 percent early withdrawal that is comprised of contributions or conversions. Rhonda, because she’s a genius, took care of her money early. When she hit 56, it was time to go on her dream vacation. She never took the 10 percent hit because she planned for her early retirement with a Roth IRA.

If she wanted to avoid the taxman, Rhonda couldn’t touch her growth or earnings. She had to wait five years for the conversions. However, she took a lot of investment capital out tax-free, then reinvested it in a new business to further insulate her against the government’s sticky fingers.

There are definitely some requirements to qualifying for a Roth IRA, but you can convert existing funds and get started straight away.

Let your money grow in a Roth IRA. Be a beast, and your retirement will be a beauty.

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Are you using a Roth IRA and loving it? Tell me about it in the comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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