Is There Anything Better Than a Roth IRA?
With a Roth IRA, you can save post-tax dollars tax-free to withdraw them tax-free in retirement. NerdWallet recommends opening one with an online broker that charges low trading fees, offers commission-free mutual funds and ETFs, and provides good customer service.
Consider using a robo-advisor, which can create a diverse portfolio for you with low fees and minimal account minimum requirements.
1. Tax-free withdrawals in retirement
Roth IRA withdrawals differ significantly from traditional IRAs in that their earnings will not incur taxes upon withdrawal at retirement age. That makes Roths especially appealing for people who anticipate that their income tax rates might increase, such as millennials and Gen Zers.
As it’s impossible to predict your tax bracket decades into the future, if you anticipate that taxes in retirement may be higher than they are now a Roth account may make sense. Withdrawals from this account are free from penalties while earnings on investments continue growing tax-free forever.
Conversely, required minimum distributions must begin being made from your traditional IRA by age 70.5; otherwise you’ll incur a 10% early withdrawal penalty and ordinary income taxes on any withdrawal before that point.
2. Flexibility
Roth IRAs are tax-advantaged accounts that allow you to withdraw contributions (but not earnings) at any time without incurring tax penalties, making them especially helpful during an emergency and helping ease some of the stress involved with saving for retirement.
Roth IRAs provide maximum flexibility at both ends of the investment spectrum: They don’t mandate minimum distributions (RMDs) upon retirement – which could otherwise halt tax-advantaged compounding of your money’s growth. By comparison, traditional IRAs and 401(k)s do have RMD requirements.
Before retirement, Roth IRAs provide you with a flexible way of withdrawing contributions without incurring a penalty – ideal for situations like purchasing your first home. Other retirement accounts usually charge income tax and an additional 10% penalty upon withdrawals of earnings; thus limiting tax burden. Roth IRAs’ advantages could prove especially valuable should you expect yourself to move into higher tax brackets at some point during life.
3. Diversification
Diversification can reduce risk and maximize returns over the long term, making your investments safer while increasing potential returns. You can diversify in various ways, from selecting multiple stocks or investing in nontraditional assets such as real estate. A qualified self-directed IRA custodian can assist in designing an investment strategy tailored specifically to your unique needs and financial goals.
Many IRA providers provide access to an impressive selection of mutual funds and ETFs, including low-cost index funds that offer significant diversification. If possible, find target-date funds that align with your desired retirement date; these investments automatically rebalance as time progresses to take on more or less risk as your retirement date nears.
Other retirement-friendly investments include dividend stock funds, which invest in mature companies that pay quarterly payouts to shareholders and can be reinvested back into the fund, compounding over time. Or you might opt for income-generating investments like municipal bond funds which provide tax-free income in retirement.
4. Easier to manage
Roth IRAs offer an appealing solution, since early withdrawals don’t incur taxes and penalties like other retirement accounts do. You’re free to withdraw contributions tax-free* – though if you plan to take distributions prior to reaching retirement age, take note of both current and potential tax brackets before doing so.
If your income tax bracket will increase in retirement, a Roth account might make more sense than traditional accounts. Compound interest works to your benefit over time.
Finding an IRA provider with low fees, account minimums, and human advisor support is of utmost importance. To find your ideal platform, check out Business Insider’s best IRA online brokers review of Schwab to help find one that meets all these criteria and more. Our ratings are determined by factors like investment options available, fees/minimums charged per account type and customer service provided – along with our full disclosures! Open a new account now or sign in to manage an existing IRA with Schwab now!
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