Many consumers are uncertain of whether they should open an IRA account to save for retirement. Even those who have decided to begin saving for retirement with an IRA might not know whether a ROTH IRA or a traditional IRA account is the best way to save for retirement. Deciding which type of retirement account is best should involve understanding the main differences between a few major options.
Some of the basic options for putting retirement money into an account are the 401(k) and the IRA. While a 401(k) can be a good option for those whose employers offer it, there are still many people are either self-employed or work for employers who don't offer 401(k) programs. It's also important to note that IRAs offer some great advantages that might make them more appealing for even those who are eligible for 401(k) accounts.
Two major IRA options
ROTH IRAs and traditional IRAs are the two main IRA types to choose from when saving for retirement through an IRA. The key difference to understand between a ROTH IRA and a traditional IRA is that with a ROTH IRA, taxes are paid upfront on money that's contributed to the account. This is opposed to when it is withdrawn during retirement.
The following are six of the major benefits of the ROTH IRA setup to consider when determining if ROTH IRA retirement savings are the best course of action:
1. ROTH IRAs give consumers more control over their retirement savings.
Overall, ROTH IRAs tend to offer the most flexibility in comparison to a lot of other retirement account options. Certain types of retirement savings account like 401(k) and traditional IRAs involve penalties for early withdrawals.
Those with a ROTH IRA aren't required to start taking minimum distributions from their account when they reach 70 1/2 years old. Also, those with a ROTH IRA are free to take any withdrawals they want out of their account early. The only penalties are on investment earnings withdrawals that the account has acquired.
2. ROTH IRAs can consolidate funds saved up from multiple jobs.
It's easy to put funds earned from numerous jobs through the years into one single account with a ROTH IRA. They allow account holders to roll over funds from old jobs to help consolidate their retirement funds.
3. Money left in a ROTH IRA to heirs won't be subject to taxes.
After ROTH IRA account holders pass away, they can leave everything that's left in their account to their beneficiaries and heirs. With a traditional IRA, your heirs would have to pay taxes on the money they receive from you.
The tax bill on inherited traditional IRA account funds and funds from other retirement savings accounts can be very high. The ROTH IRA is a great way to leave a tax-free inheritance to heirs.
4. It's generally easy to qualify for a ROTH IRA.
Because ROTH IRAs do offer some great tax and other advantages as well, they have certain eligibility restrictions. Consumers who earn too much money (more than $122,000 annually) might not be eligible. However, the majority of consumers can meet eligibility requirements.
In order to be eligible for a ROTH IRA, interested individuals need to earn less than $122,000 per year if taxes are filed as single or head of household. However, there is one loophole to get around this requirement.
Those whose income exceeds the eligibility requirements could possibly set up a ROTH IRA by contributing to a traditional IRA, then converting that account to a ROTH IRA. This is what's known as a "back-door" ROTH.
5. ROTH IRAs offer lots of choices.
There is a lot of flexibility with ROTH IRAs. Not only do people not have to start taking minimum distributions at age 70 1/2, but they can even continue making contributions to a ROTH IRA account when you're older than this if they still have income coming in.
Also, people are free to take early, penalty-free withdrawals—including both contributions and investment earnings if they are using the money for certain things like first-time home purchases, health insurance premium payments during periods of unemployment, and back-tax payments.
6. There’s a wide range of possible fund selections with ROTH IRAs.
One of the choices people get to make when they set up their ROTH IRA is which fund to invest in. Just a few of the different options they'll have are investing in stock mutual funds, mixed-asset funds, certificates of deposit, individual stocks, and real estate. These accounts therefore provide lots of freedom in making investment choices.