If you are in search of accounts that can spare you from taxes during the time you are saving funds for your retirement, then you may either go for traditional IRAs or 401(k) plan. Yet,, you are subject to having income tax deducted whenever you withdraw some money from your account. There is, however, a type of retirement account that is tax-free when you withdraw – and your earnings are also not taxed. This is the case with Roth IRA, although contributions are made after-tax.
Here are some pieces of information on Roth IRA including the benefits it offers.
1. Offers flexible options for your retirement funds.
There is a requirement for retirees to withdraw annually from traditional IRA and 401(k), but these are taxed. If you fail to get the minimum distribution required, then you run the risk of getting a 50-percent excise tax placed on the total amount to have been taken out – and this is on top of the income tax set on every withdrawal. On the other hand, there is no such issue with Roth IRA since you have the option to withdraw money only when you want to.
2. Withdraw funds before retiring.
In case you need some money, and you decide to withdraw some from your traditional IRA, you get a 10 percent tax penalty if you are below 59 1/2 years of age during the time of withdrawal. The penalty is added to the regular income tax once you get some funds. With Roth, account holders only need to pay early withdrawal penalties and income tax on a percentage of the withdrawal from the earnings – as long as you had your account for a minimum of 5 years. Thus, several investors in their 30s or 40s set up an IRA account to help them with their future plans of funding a property they are looking to buy. Accessing the principal this way is made possible – and it is free from penalties or taxes.
3. Great for estate-planning.
As mentioned earlier, you are supposed to take some money out from your traditional IRA during your retirement period. In addition, there are taxes to be paid by your beneficiaries on any amount left to them every time withdrawals are made. With your Roth IRA, you can choose to leave money in it if you choose to, and your heirs are able to take distributions that are free from taxes. This means, you can use this account as a tool for estate-planning, particularly when there is a part of your estate you do not intend to use for your own.
Additional Information on Roth IRA
You have the option to convert any existing portions of your savings to Roth, which is great for people of various income levels. Just remember that income tax is placed on the amount that is converted, so tax can be hefty when a large amount is converted. Hence, it is best to space out conversions over a number of years or do your conversions in one year during the time your income is very low. By doing so, you can qualify for a low tax bracket and minimize your income tax bill.