Is There Anything Better Than a Roth IRA?
Roth IRAs can be an effective investment vehicle, particularly for investors expecting to be in a higher tax bracket at retirement. Additionally, these accounts may benefit those already saving with traditional IRAs or 401(k).
Roth IRAs allow investors to invest their money in many assets, including mutual funds and ETFs. You have the flexibility of managing your own investments or working with a financial advisor or robo advisor for optimal returns.
1. Tax-free withdrawals in retirement
One reason you might want to consider opening a Roth IRA is its tax advantages: once held for five years and aged over 59 1/2, earnings can be withdrawn tax free from this account. These accounts can be found at banks, brokerages and robo-advisors.
Those worried they will move into higher tax brackets in the future should consider opening a Roth IRA. To qualify, earned income such as salary, hourly wages, tips, bonuses or commissions need to be generated in order to invest. Mutual funds or ETFs could be invested in as mutual fund alternatives while Schwab Intelligent Portfolios or Fundrise can offer professional investment management for an annual fee – helping you manage investments without hassle!
2. No required minimum distributions (RMDs) in retirement
RMDs are the government’s way of taxing money that has been safely stored away in retirement savings accounts for years. Roth IRAs may help avoid RMD requirements and save you money on taxes in the long run.
Withdrawals from traditional, SEP (for small business owners), and SIMPLE IRAs are subject to required minimum distribution (RMD) rules. Failing to take required distributions by their due dates results in a 25% penalty that the IRS may waive provided you correct your situation promptly.
Roth IRA owners do not need to worry about RMDs, which could lower your overall tax bill in retirement. But it’s wise to consult a financial professional or tax advisor regarding an RMD strategy before beginning withdrawals.
3. You can withdraw your money at any time
Your Roth IRA allows for withdrawals at any time without penalty or taxation – this can be particularly helpful if you need the money for non-retirement expenses such as health insurance premiums if you lose your job, or unreimbursed medical costs.
Fidelity offers an attractive self-directed investment account with low account and trade fees that has won the 2023 J.D. Power award for Self-Directed Investor Satisfaction.
If you want to boost your returns from investing, stocks that pay high dividends could be the way forward. Established industries usually generate steady streams of revenue that allow your money to compound over time.
4. You can invest your money in a variety of assets
Roth IRAs provide you with an opportunity to invest in stocks, bonds, mutual funds and exchange-traded funds without incurring taxes or penalties (though there is typically a 5-year holding period).
Roth IRAs can be opened at a variety of financial institutions, from online stockbrokerages and robo advisors to traditional stockbrokers and mutual fund dealers. When selecting one to open, look for ones with user-friendly tools, responsive customer service representatives and low fees.
Charles Schwab offers free trades of stocks and ETFs as well as low fees on options trades for new investors, along with an educational section and user-friendly platform. When selecting your asset allocation strategy, choose an asset allocation that reflects your risk tolerance; those near retirement should focus on investing more heavily in bonds than stocks.
5. You can withdraw your money at any time
Pulling money out of a Roth IRA before retirement usually means paying taxes and possibly penalties, but if you meet the rules for “qualified withdrawal” before age 59 1/2–taking only your original contributions and not investment earnings–then this could reduce or eliminate these costs altogether. Examples of qualified withdrawals could include purchasing your first home, purchasing vehicle, paying medical costs related to disability, making payments to beneficiaries or estate after death etc.
Some investment firms charge annual or monthly account maintenance fees; others impose transaction fees when you buy and sell stocks and ETFs in your account. When selecting an online brokerage for use with your Roth IRA, look for firms with low or no account maintenance fees as well as flexible investment fees.
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