When you retire, you’ll likely want to enjoy a lifestyle you couldn’t fit into your schedule or budget while working. Maybe you want to golf, travel or play with grandchildren. To make those things happen, you’ll need to start saving and one of the best ways to save is with a Roth IRA.
Benefits of a Roth IRA
Roth IRAs are retirement savings accounts that build on after-tax contributions. That means you pay taxes on your money before you deposit it in your retirement account—which translates to a number of benefits.
- Tax-free withdrawals in retirement. The big payoff of a Roth account is that you won’t be taxed on withdrawals like traditional IRAs and other retirement plans. Although you must be 59½ or older and have held the account at least five years to make those tax-free withdrawals, those conditions are easy to meet, especially if you start saving early.
- Tax-free earnings. Your account will earn additional money, either through interest (in a deposit account) or investment returns (in an investment account), and this additional money won’t be taxed, either. So if, for example, you contribute $20 to a Roth IRA and it grows to $30, that $10 of growth is yours, tax-free, to spend as you wish.
- Access to your money if you need it. You can withdraw money you contributed to a Roth IRA anytime, for any reason, without tax or penalty since you’ve already paid taxes before you made the contribution. It’s a great perk if an emergency arises. Your earnings (dividends) will be taxable until you reach age 59½.
- Contribute as long as you have earned income. You can continue making contributions to a Roth IRA as long as you’re earning money. So you can enjoy the flexibility of keeping your account growing if you want to keep working.
- No obligation to begin withdrawing. With traditional IRAs and other retirement accounts, you must begin drawing down the balance once you turn 72.1 Your Roth IRA, however, has no required minimum distributions during your lifetime. That means you get to enjoy the flexibility either to use some or all of the money for your retirement or let it grow for your heirs.
- Pass tax-free money to heirs. A Roth IRA is a good choice if you want to pass money on to children, grandchildren or other heirs because you can share more of your wealth with them (since they can withdraw it tax-free). That’s not the case with a traditional IRA—heirs will owe taxes on withdrawals.
How to Start a Roth IRA
You can open a Roth IRA at a bank, credit union, brokerage or mutual fund company. Follow these steps:
- Decide whether you want a deposit account or an investment account for your Roth IRA. An investment account offers greater potential for growth, but comes with risks. Your account balance can go up and down. The balance in a deposit account won’t decrease (unless you make withdrawals), and it’s federally insured for up to $250,000, but you may not earn as much.
- Make a contribution. You can put up to $5,500 a year into your Roth IRA. If you’re age 50 or older, you can make an additional $1,000 catch-up contribution each year.
- Monitor your account. Over time, tax-free compounding interest or investment returns help your balance grow.
- Make plans to live the life you want when you retire. Planning ahead by opening a Roth IRA and contributing to it every year can help you achieve your retirement dreams.
1For IRA owners who turn 70 1/2 on or after 1/1/2020.