written by Mark Lamb
Roth IRA’s are often the wallflower of retirement planning. But, Roth IRA’s are coming into their own and becoming more popular.
The conventional wisdom of most retirement saving methods (i.e. 401(k) or traditional IRA) has been based on deferring compensation from the present to the future. Since deferring means ‘putting off’, not only is the income being ‘put off’ into the future, but so are the related income taxes. A Roth IRA takes a different approach with no income tax deduction up front. This may seem to be a deal breaker, but the offsetting benefits come in the future. Here are three important benefits of utilizing a Roth IRA.
Freedom from Taxation
Roth IRA’s are marketed mainly for their ability to grow in value, while at the same time escaping taxation. This means that the initial investment and future earnings of the account are potentially never taxed. * This ability of compounding years of tax-free money can turn into quite a sum of money.
Flexibility with Cash
A Roth IRA offers cash flow flexibility while saving for, and also during retirement. Although it’s not a good idea to view a Roth IRA as a source of cash for current spending; nevertheless, they are an option without incurring penalties and taxes.*
Additionally, because withdrawals from the Roth account are tax free, the full distribution can be utilized without having to set aside a portion for taxes.
If retirement savings are in the form of ‘deferred compensation’; as withdrawals are made from the accounts, the risk could come up of needing to withdraw even more funds in order to pay the resulting taxes. But; if savings in a Roth IRA are also available, withdrawals could be made from that account in order to pay the taxes. This avoids the creation of taxable income, and potentially gives you more spendable income in retirement.
One other benefit of a Roth IRA is there is no required minimum distribution (RMD). With traditional IRA’s and 401(k) plans, at age 70 ½ the owner must begin withdrawing at least a minimum amount from the account each year. Depending on other income, this RMD could potentially lead to an income tax liability. However; since withdrawals from a Roth IRA are never required, the balance can remain untouched and continue to grow tax-free.
A Roth IRA is certainly something to be considered in overall retirement planning. As with any tax or financial planning, each situation is unique. Consult with your CPA and financial advisor to discover if you could benefit from a Roth IRA
*Accountholder must be 59 ½ or older, and have held the account for at least 5 years.