Is a Roth the right IRA for you?
How is it different than other IRAs?
What makes a Roth IRA different? A few things. The Roth IRA provides no tax deduction for contributions. Instead, it provides a benefit that isn’t available for traditional retirement accounts: If you meet certain requirements, all earnings are tax-free when you or your beneficiary withdraw them. Other benefits include avoiding the early distribution penalty on certain withdrawals and eliminating the need to take minimum distributions after age 70.5.
Pros and Cons
The most obvious pro of a Roth IRA is it enables your investment earnings to completely escape taxation. The advantage comes at a price, though: You don’t get a deduction when you contribute to the Roth IRA. You need to decide what is important to you. It depends on your personal situation and on what assumptions you want to make about the future. You may want to ask yourself:
- How long before you withdraw money from your IRA?
- What will your tax bracket be then?
- What earnings can you anticipate in the interim?
Most people are better off in the Roth IRA, mainly because it is effectively bigger than a regular IRA because it holds after-tax dollars. If you can take advantage of this feature of the Roth IRA by maximizing your contributions, you could add greater tax leverage to your retirement savings.
There are two other significant advantages to the Roth IRA. One is that the minimum distribution rules don’t apply. If you’re able to live on other resources after retirement, you don’t have to draw on your Roth IRA at age 70.5. That means your earnings continue to grow tax-free. The other big advantage is the ability to take certain early distributions without paying the early distribution penalty. In short, the Roth IRA makes it easier to keep your money in — and also easier to take your money out.
Distributions from Roth IRAs are tax-free until you’ve withdrawn all your regular contributions. After that, you’ll withdraw your conversion contributions, if any. When you’ve withdrawn all your contributions (regular and conversion), any subsequent withdrawals come from earnings. Withdrawals of earnings are tax-free if you’re over age 59.5 and at least five years have expired since you established your Roth IRA. Otherwise (with limited exceptions) they’re taxable and potentially subject to the early withdrawal penalty.