Advantages of a Roth IRA

by Michael on Jan 14, 2013 · 2 comments

Photo of IRA Written on Stone over Sand

After singing the praises of traditional (i.e., tax-deferred) retirement accounts, I thought it was only fair to highlight the advantage of Roth retirement accounts, too.

Obviously, Roth accounts are nice because, though your contributions are non-deductible, all qualified distributions are tax free.

But the advantages don’t stop there… At least not when it comes to Roth IRAs.

While qualified Roth retirement plans, including the 401(k), 403(b), and 457(b) variants, don’t necessarily share these advantages, such plans can be rolled into a Roth IRA when you separate from employment.

What follows is a quick rundown of some of the advantages of Roth IRAs:

  • Dollar-for-dollar, Roth contributions are (effectively) larger than tax-deferred contributions thanks to the tax-free distributions.
  • Contributions can be withdrawn tax/penalty free at any time.
  • Conversions can be withdrawn tax/penalty free after five years — or once you hit 59.5 years old, whichever comes first.
  • Up to $10k in earnings (lifetime max) can be distributed to help defray first-time homebuyer expenses once the five-year rule* has been met.
  • There is no required minimum distribution (RMD) with a Roth IRA.

*Note: For distributions to be “qualified” (and thus tax/penalty free), five years must have passed since your Roth IRA was established (and certain other criteria must be met). Note that this is different from the five-year clock for conversions, which starts ticking at the date of each conversion.

Yes, I realize that some of the above advantages could equally well be viewed as disadvantages because they make it easier to raid your retirement. But, at least for the sake of this article, I’m calling the added flexibility an advantage.

There are other, more subtle (yet complex) advantages of Roth IRAs from an estate planning perspective, but those go well beyond the scope of this article. If you’re looking for a comprehensive overview of IRAs, see IRS Publication 590.

On the downside, your may not be able to contribute to a Roth IRA if your income is too high. That being said, you can always do a “backdoor Roth”, wherein you make non-deductible contributions to a traditional IRA and then convert those funds to a Roth IRA. The income limits for conversions went away back in 2010.

Just be aware…

If you’re thinking of doing a backdoor Roth, there are added complications if you happen to have a traditional IRA (including SEP and/or SIMPLE) with tax-deferred contributions. Once again, this goes beyond the scope of the current article.

More on this subject in the future… 🙂

1 TTMK January 14, 2013 at 8:46 pm

Roth IRAs can be a great vehicle into which people can put a portion of their retirement funds. The notion of qualified distributions being tax-free is appealing, not just because of the math but also due to the peace of mind factor. What you see is more what you get, as opposed to some other tax-deferred vehicles (which can be excellent in their own right anyway)

2 The College Investor January 16, 2013 at 1:13 am

I love my Roth IRA and plan to continue to contribute to it as long as my income doesn’t get too high!

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