Benefits of a Roth IRA
A Roth individual retirement account (IRA) is a tax-advantaged account designed specifically for retirement savings. Unlike a traditional IRA — which is typically funded with pretax dollars — a Roth IRA is designed to help you save for retirement with after-tax contributions, and it offers the potential for tax-free income in retirement.
Once you open and fund a Roth IRA, you can invest your assets in stocks, bonds, certificates of deposit (CDs), mutual funds, exchange-traded funds (ETFs) and money market funds. These choices give you the opportunity to diversify your savings with an appropriate mix to help meet your retirement objectives.
Roth IRA benefits
Tax-free income
If you invest in a nonretirement account, your earnings are subject to federal, state and local taxes each year. Not the case with a Roth IRA. The money you invest in a Roth IRA grows tax free, and once you start withdrawing funds and certain requirements are met, the money you take out is tax- and penalty-free.
In addition, these funds can help you better manage your taxable income in retirement, which, in turn, can help you reduce other taxes and surcharges. For example, since Roth IRA withdrawals are not counted when determining the percentage of your benefits that could be taxed, you may be able to keep more of your Social Security benefit. They may also lessen your exposure to Medicare surcharges, since Roth IRA funds are not part of your modified adjusted gross income (MAGI), which is used to determine the premiums higher earners pay.
Potential tax savings
With a traditional IRA, you are taxed when you make withdrawals, and you end up paying taxes on contributions and earnings. Again, not with a Roth IRA. You pay taxes up front on the money you put into a Roth IRA, and qualified withdrawals are tax-free. This can be advantageous if you're in a low tax bracket, you expect to be in a higher tax bracket in the future, or you have a long time horizon to benefit from tax free compound earnings.
Account flexibility
With a Roth IRA, you can take out your contributions at any time and for any reason, with no taxes or penalties. While we generally recommend saving retirement assets for retirement, this unique feature can provide you with access to your funds before retirement if you have a financial emergency.
No RMDs
Generally, once you reach age 73, you are required to take annual required minimum distributions (RMDs) from your retirement accounts. Roth IRAs have no RMDs during the lifetime of the original account owner. So, if you don’t need the money, you can leave the funds to continue to grow tax free, earning more for you or your heirs.
Tax-free money to heirs
Since you've already paid taxes up front, your heirs generally don't have to pay income taxes on inherited Roth IRAs. Additionally, your heirs can continue to hold the assets in the Roth IRA for a period of time (in most cases, up to 10 years) for it to continue to grow tax free.
Roth IRA contribution limits
Roth IRAs and traditional IRAs have the same contribution limits. For 2024, you can contribute up to $7,000 (or up to $8,000 if you’re age 50 or older). Contributions can be made at any time during the year up to the tax-filing deadline (usually April 15), not including extensions.
Roth IRA eligibility
To be eligible for a Roth IRA, you must have taxable compensation and your MAGI must be below a certain threshold. MAGI limits vary, depending on your tax-filing status. Your Roth IRA contribution may be lower than the contribution limit, or you may not be able to contribute at all. A tax advisor can help determine your exact contribution maximum.
If your MAGI exceeds the limits, you may still be able to contribute to a Roth IRA through a backdoor Roth contribution. First, you make an after-tax contribution to a traditional IRA, then convert these contributions to a Roth IRA. Important note: You may have to pay taxes on the conversion. Again, it’s best to consult with a tax advisor prior to converting to ensure this strategy is appropriate for your situation.
How Edward Jones can help
A Roth IRA can be an essential part of your retirement savings strategy. A financial advisor can work with you to help determine what’s important to you, review your retirement options and design a personalized plan based on your long-term goals.