What is a Roth IRA?
A Roth IRA is a type of retirement account that allows your investments to grow tax-free. Unlike a traditional IRA, where you contribute pre-tax dollars and pay taxes when you withdraw funds in retirement, Roth IRA contributions are made with after-tax dollars. With the power of a Roth IRA, you won’t have to pay taxes on your earnings (or the principal for that matter, which is never taxed, even if distributed before retirement) when you start taking distributions, as long as you meet certain conditions, meaning you can grow your wealth and keep more of what you save.
Why Should You Consider a Roth IRA?
Tax-Free Growth
One of the biggest advantages of a Roth IRA is that your earnings grow tax-free. That means all the interest, dividends, and capital gains you earn in the account won’t be taxed when you withdraw them in retirement. When starting young, this usually results in the most amount of wealth by retirement. Always consult a tax professional and certified financial advisor to find out what works best for your individual tax situation.
No Required Minimum Distributions (RMDs)
With a Roth IRA, you’re not required to start taking money out at a certain age, unlike traditional IRAs and 401(k)s. This gives you more flexibility and allows your investments to continue growing for as long as you want. This allows more flexibility in retirement, especially if you pair a Roth IRA with other investment accounts, such as Traditional retirement accounts and Taxable accounts.
Access to Contributions
Although Roth IRAs are intended for retirement, they offer a unique benefit — you can withdraw your contributions (but not the earnings) at any time without penalties or taxes. This can be a safety net if you need access to your funds in an emergency. Don’t do this if you can avoid it! Dipping into your money now handicaps your growth potential and you can’t put that money back to catch up.
Estate Planning Benefits
Since Roth IRAs don’t have RMDs, they can be a great way to pass wealth on to your heirs. The account can keep growing tax-free for a certain amount of time after you pass it on, which is an advantage for long-term wealth planning. However, there may be tax implications for the heir depending on certain tax laws at the time they decide to take distributions. Always consult with an estate planning and tax attorney for the best advice for your situation.
Who is Eligible for a Roth IRA?
To contribute to a Roth IRA, you must meet specific income requirements, which can be found from Fidelity’s website (also published by the IRS).
If your income is above these limits, you may still be able to contribute through a strategy known as a Backdoor Roth IRA, which we’ll cover in a future post.
Getting Started
Opening a Roth IRA is easy. You can set one up with a variety of financial institutions, including banks, brokerage firms, and online investment platforms. Once it’s open, you can choose to invest in stocks, bonds, mutual funds, ETFs, and more. It’s a flexible account that lets you grow your money over time, and the earlier you start, the more you benefit from the power of compounding.
Roth IRAs are about long-term growth, taking advantage of compounding, and preparing for the future, all while minimizing future tax liability. If you’re a tech professional who wants to build a secure financial future, a Roth IRA is one of the best accounts to start with.
