Retirement planning is something that everyone of us should do as soon as possible. It is never too late or too early to plan your future.
Speaking of retirement, the government provides retirement plans to qualified employees. Aside from the traditional plan, you might be considering investing in Roth IRA. But what is it and what are the benefits of choosing it over the traditional plan?
Proposed by Delaware Senator William Roth and enacted in 1997, the Roth IRA is a retirement plan that bears many similarities with the traditional plan. The major difference lies on how they are taxed. With traditional IRA contributions, payers can get a deduction in their contributions and pay income tax when they withdraw money from their account. On the other hand, Roth IRA is funded with after-tax dollars which means it is not tax- deductible. However, once you start withdrawing money upon reaching retirement, your withdrawals are tax-free.
The Roth IRA is a least popular retirement and investment plan. However, there are several reasons why you should consider it as well.
Tax Advantages
Aside from the fact that Roth IRAs are funded with after-tax contributions, your money is invested in the type you prefer, such as stocks, bonds, or mutual funds. Once your investments grow in value, you can receive the gains tax-free as well. You can invest up to $5,500 a year in your Roth IRA. If you’re over 50, you can add $1,000. Additionally, it does not increase your tax liability and tax rate, Medicaid premiums, and Social Security taxes.
Available for All Working Individuals
If the company you work for does not offer the 401(k) plan, you don’t have to lose hope. Roth IRA is a great investment tool for any working individuals. As long as you earn income from work and you meet the requirements under this retirement plan, you’re good to go. Furthermore, even if you managed to hit your plan’s annual contribution limit but you still wish to put more towards your retirement savings, you can do so with your Roth IRA. The amount of your contributions in your Roth IRA is not affected by your 401(k) contributions so you can keep saving up for your future.
Control Over Funds
Another advantage of Roth IRA is that you can withdraw your investments at anytime without paying penalties or taxes. For example, if you invested $5,500 in stocks and it has grown to $10,000, you can still withdraw your initial investment. This is very useful when you have to deal with unplanned expenses. You can use the money to pay the cash advance or personal loan you used to cover the emergency. Compared with a traditional IRA, the Roth IRA gives you more flexibility and control over your investments.
No Age Limitation
With traditional IRAs, the maximum age for making contributions is 70.5. However, with a Roth IRA, you can contribute as long as you want. Additionally, Roth IRAs can be set up by younger people (minors) who have earned income of their own. This is a great opportunity for everyone who wants to start early in securing their financial future.
No Required Minimum Distributions
Once the contributor reaches the 70.5 years, his/her account balance is no longer subjected to the required minimum distributions (RMDs) while most other retirement plans like the 401(k) and the traditional IRAs have. This means that you are in control of when you want to spend your money and are not forced to take withdrawals. It’s even more beneficial if you’re looking to grow your investments for a longer period of time.