A Roth IRA is an individual retirement account that is funded with after tax dollars. It is arguably one of the best investment vehicles to invest within mainly due to its tax free advantages, flexibility, and long term wealth building potential.
Most people know about the tax perks, but there are several other benefits of a Roth IRA that are less talked about and they’re just as important to understand.
If you don’t have a Roth IRA yet, or even if you do, here are
Four key benefits to consider as you plan for your financial future.
1. Tax Free Growth & Withdrawals
The biggest advantage of a Roth IRA is its tax free growth and withdrawals in retirement. Here’s how it works:
- You open a Roth IRA and contribute after tax dollars into the account (basically anything coming out of your savings or checking account is considered after tax).
- You invest the funds within the account and watch them grow for decades
- Any earnings within the account will grow tax FREE
- Once you’re age 59 ½ and have held the account for at least 5 years, you can withdraw both contributions and earnings completely tax free.
Tax free growth, compounding year after year, is POWERFUL and has a massive impact on long term wealth.
Quick Tip: You can always withdraw your original contributions from a Roth IRA tax and penalty free at any time, giving you an extra layer of flexibility (although not recommended).
2. Flexibility in How Funds Can Be Used
Unlike other tax advantaged accounts, Roth IRAs don’t restrict how you use your money once you’re eligible for withdrawals. For example, other tax free accounts like a 529 plan is only for education, and an HSA is only for qualified medical expenses. A Roth IRA simply requires you to wait until 59½ to withdraw earnings, but then you can use the money however you want.
Some of you may be skeptical about having to wait until you are 59 1/2 to use the funds, but there are a few exceptions that allow you to access funds before retirement without penalty. See below for a few qualified distributions and visit the IRS website to learn about more options.
- First Time Home Purchase: Up to a $10,000 lifetime maximum
- Qualified Education Expenses
- Qualified Expenses Related to Birth or Adoption
- Disability or Death
- Unreimbursed Medical Expenses or Health Insurance if Unemployed
3. A Powerful Wealth Transfer Tool
Unlike traditional retirement accounts, the Roth IRA/401K does not have required minimum distributions. Per the IRS guidelines, you are typically required to withdraw a certain percentage of your retirement account balance per year starting at age 73, forcing you to withdraw whether you need the money or not.
With a Roth IRA, there are no required minimum distributions during your lifetime. That means your money can continue compounding tax free for as long as you live and potentially for future generations.
For those with significant wealth, you may consider this as you continue to navigate how to be most tax efficient with your wealth.
For many others, you might ask why would I save for retirement if I won’t end up needing the money? Or why would I care if I can transfer it effectively, I want to use it?!
Here’s the thing, none of us – NO ONE – know what the future holds. You don’t know the money or opportunity that will be presented to you years from now. You may just find yourself in a position that your Roth IRA account will be in excess of your needs.
So it is nice to know that if you prioritize your Roth IRA, it can continue to grow tax FREE for years to come without losing your future wealth to taxes
4. Avoid Double Taxation Upon Death
This benefit is especially important for high net worth families.
If you pass away with a Roth IRA, your beneficiaries inherit the account and can make withdrawals tax free. If you pass away with a Traditional IRA, your beneficiaries must pay ordinary income tax on withdrawals.
But let’s add a level of complexity here….Estate Taxes.
Let’s say you have significant wealth. Imagine you have $20 million estate that you’ll pass on to your heirs (the continuation of this not apply to a spouse to spouse transfer).
The IRS and potentially your state will want a piece of that net worth you are passing down. Your heirs and your estate could face up to a 40% estate tax and the state will have its own set of rules and rates.
- If that estate includes a Traditional IRA, your heirs not only pay estate tax but also income tax on withdrawals. That’s double taxation, and it significantly reduces the wealth you worked hard to build.
- With a Roth IRA, heirs may still face estate tax on the value of the account, but withdrawals remain tax free. This makes Roth accounts one of the most tax efficient ways to pass on wealth.
It’s important to discuss with a tax advisor on how to be most tax efficient with your assets as you consider transferring your wealth to the next generation.
Note: Among high net worth families, it may be worth considering a Roth Conversion for your traditional retirement assets to avoid the potential for double taxation of your assets.
Final Thoughts on the Benefits of a Roth IRA And Why It Deserves Your Attention
The Roth IRA is much more than a retirement savings account. It offers:
- Tax-free growth and withdrawals
- Flexibility in how funds can be used
- No required minimum distributions
Whether you’re focused on building wealth, protecting your family, or leaving a meaningful legacy, the benefits of the Roth IRA are hard to ignore.
But here’s the truth: learning about money isn’t enough…action is what moves the needle.
Your financial future doesn’t have to feel overwhelming or out of reach. With the right strategies and guidance, you can make your money work for you — and the Roth IRA is one of the best places to start.
