Roth IRA benefits: 5 reasons why Roth IRAs can be a powerful investment tool

Don’t overlook the benefits of a Roth IRA, which is among the most flexible retirement accounts.
Smiling man reviewing his accounts at an open air cafe

When saving for retirement, there are a variety of investment accounts that you can leverage to help achieve your goals. But there’s one account in particular — a Roth IRA — that can be particularly beneficial and versatile for investors. 

If appropriate for your situation, we can help you invest in a Roth IRA, as well as identify strategies to still take advantage of one even if you earn too much to directly contribute. 

Here are five reasons why a Roth IRA can be a powerful investment tool for retirement: 

1. Roth IRAs can provide a tax-free source of retirement income 

The most significant benefit of a Roth IRA is its tax advantages. Funded with after-tax contributions, a Roth IRA allows for tax-free investment growth and tax-free withdrawals in retirement. This means that when you retire, you won’t have to pay taxes on any of your earnings, provided certain conditions are met. 

There are a couple of caveats to remember, however. To qualify for tax-free withdrawals, you typically can’t withdraw earnings before age 59 ½, and the account must be open for at least five years (known as the five-year rule), though there are some exceptions. If you don’t adhere to these rules, you may be subject to taxes and a 10% penalty.  

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Roth IRAs allow you to diversify how your retirement income is taxed. It’s impossible to predict how tax rates may change in the future. Roth IRAs allow you to hedge against the possibility of future tax hikes by creating a pool of retirement income that is insulated from taxes. In this way, a Roth IRA gives you more flexibility in managing your taxable income in the future. 

2. You’re in control of the investment offerings 

With employer-sponsored retirement plans like a 401(k), you are typically limited to investment options that the plan offers. However, a Roth IRA is an individual retirement account. This means it’s an account that you open at your own discretion with a company that offers the investment options and services that appeal to you.  

This gives you flexibility over the different types of investments that most align with your financial strategy. This could be especially beneficial if professional financial advice is a priority for you or you want to have the flexibility to incorporate more sophisticated investments, like REITs, into your portfolio. 

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Use this calculator to see how converting your traditional IRA to a Roth IRA could affect your net worth at retirement.

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3. Your withdrawals are exempt from RMD rules 

When you reach a certain age, federal law requires you to begin withdrawing funds from certain retirement accounts. Known as required minimum distributions (RMD), this mandate can be challenging to adhere to, results in penalties if not followed correctly and generally limits the control you have over your retirement income distributions.  

However, while accounts like traditional IRAs and 401(k) plans are subject to RMDs, Roth IRAs are not. This means you can decide how and when you want to access your Roth IRA funds in retirement (provided you meet the age and the five-year rule requirements). It can also help you manage the impact of taxes, since it’s not uncommon for income from RMDs to push investors into a higher tax bracket. 

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Even if you make too much to contribute to a Roth IRA, there are still ways to fund one. While there are technically income limits on who can contribute to a Roth IRA, current tax law allows investors above the current thresholds to indirectly fund one via a Roth IRA conversion strategy known as a backdoor Roth IRA.  

4. You can pass your Roth IRAs to your heirs tax-free 

Another benefit of a Roth IRA is that it can be used as a tax-efficient estate planning tool. Unlike a 401(k) or a traditional IRA, beneficiaries of a Roth IRA will pay no taxes on the money in the account. However, while distributions from the inherited Roth IRA will be tax-free if the five-year rule has been met, non-spousal heirs will be subject to RMD rules for the account. If your heir is your spouse, then RMD rules do not apply if they move it to their own Roth IRA. 

5. You can access the principal without penalties 

While you generally won’t want to withdraw funds from your Roth IRA before retirement, Roth IRAs are surprisingly flexible in that you can readily access your contributions without penalty.  

Because a Roth IRA is funded with after-tax dollars, you’re allowed to withdraw the principal contributions — though not earnings — at any time without being subject to penalties. While, by and large, you won’t want to access these funds before retirement, it is an uncommon feature for retirement accounts and can provide flexibility if needed. 

How may a Roth IRA benefit you?  

We can help you determine if a Roth IRA fits into your overall retirement strategy. 

Questions to discuss with us

  • How does a Roth IRA fit into my overall retirement strategy? 
  • Should I be contributing to a Roth IRA or traditional IRA?  
  • How can I still take advantage of a Roth IRA if my income is too high?