Roth IRA Key Benefits Explained (2024)

A Roth IRA can be a valuable tool for rounding out a retirement savings plan or starting one if you’re not setting money aside for the future just yet.

You might consider a Roth if you:

• Are maxing out your 401(k) or its equivalent at work and have extra money to put toward retirement.
• Aren’t maxing out your workplace plan yet, but want to diversify where you invest your retirement savings.
• Don’t have a retirement plan at work and want to avoid a potential savings shortfall later.

A Roth IRA isn’t your only option for retirement. You can also open a traditional IRA. But between the two, a Roth allows you greater flexibility with withdrawals, and there are some tax benefits, too. There are, however, some income restrictions on who can open a Roth IRA.

Roth IRAs can help you build wealth through the power of compounding interest. Compounding means that you earn interest on your interest. It might sound a little complicated, but here’s the bottom line: the younger you are when you start contributing to a Roth account, the longer your money has to grow.²

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Roth IRAs offer some unique benefits to savers that are too valuable to pass up. If you’re not familiar with Roth IRA basics, here’s a rundown of some of the most important benefits to know.

• Tax-free growth. When you add money to a Roth IRA, whether it’s a little or a lot, you’re investing it. Assuming your investments do well, your contributions can grow thanks to that nifty compounding mentioned earlier. All of that growth in your Roth IRA is tax-free.³
• Tax-free withdrawals. A Roth IRA is funded with after-tax dollars, meaning you’ve already paid taxes on the money that’s going into your account. Why does that matter? When you retire, you can take that money out of your Roth without paying taxes on it again.³
• No minimum distributions. Traditional IRAs have a special rule that requires you to start taking money out of your account once you turn 73. If you don’t take required distributions, the IRS can assess a steep tax penalty. Roth IRAs don’t have that rule, so you can leave your savings in your account for as long as you’d like.^3,4
• Penalty-free withdrawals of original contributions. Since you’re putting after-tax money into a Roth IRA, the IRS allows you to withdraw those original contributions tax-free at any time. There’s no early withdrawal tax penalty either if the account has been open for at least five years.⁵
• Tax credit eligibility. The Retirement Saver’s Credit is a tax credit that essentially rewards eligible taxpayers for making retirement account contributions. Saving in a Roth IRA can help you qualify for this credit, which can help to lower your tax bill.⁶
• No age restrictions on contributions. You can contribute to a Roth IRA at any age as long as you meet the earned income guidelines. If you’re planning on working beyond the typical retirement age, you can keep adding money to your Roth to take advantage of tax-free growth.⁷
• Inherited Roth IRAs are tax-free. When you open a Roth IRA, you can name one or more beneficiaries who will inherit your account when you pass away. Your heirs can withdraw your Roth IRA benefits without paying income tax as long as the account has been open for at least five years.⁸
• Double up on savings. As mentioned, you may be able to fund both a Roth IRA and a retirement plan at work. That could mean a traditional 401(k) or a Roth 401(k). Eligibility for a Roth IRA is based on your income and filing status, but assuming you qualify, having both accounts means more opportunities to fund your retirement.⁹
• Backdoor Roth eligibility. Eligibility for a Roth IRA is income-based and if you don’t qualify, you won’t be able to open one. You could, however, move some or all of your non-tax deductible contributions made to a traditional IRA into a Roth account using a backdoor conversion. It’s a little complicated and you might want to talk to a retirement planning or tax planning expert, but if you’re eligible you could still enjoy Roth IRA benefits this way.¹⁰
• Reduce/avoid Medicare surtax. The Medicare surtax is a 3.8% tax on net investment income and it goes toward funding Medicare expansion. The tax only applies to you once your income exceeds a certain threshold. A Roth IRA could reduce what you owe or help you avoid this tax altogether since withdrawals are not included in the income calculation for the tax.^11,12
• Diverse investment options. If you’re saving in a retirement plan at work, your investment options might be limited to a handful of mutual funds. A Roth IRA could open you up to a broader range of investments, making it easier to diversify your portfolio.
• Plan for increasing income. If you’re opening an IRA in your 20s or 30s, you likely haven’t hit your peak earning years yet. A Roth IRA helps you anticipate income increases that could potentially put you in a higher tax bracket once you retire. Funding your account with after-tax dollars now means less of a tax sting when it’s time to withdraw the money later.

There are many compelling reasons to consider a Roth IRA, but that doesn’t mean they’re right for everyone. Here are a few downsides to consider when deciding if a Roth account is a smart fit.

• No tax deduction for contributions. Traditional IRAs can offer an upfront tax benefit in the form of tax-deductible contributions. Since you’re funding a Roth IRA with after-tax dollars to make tax-free withdrawals in retirement, you don’t get to double-dip and deduct contributions.³
• Not everyone is eligible to contribute. The biggest drawback of a Roth IRA is that you have to be income-eligible to contribute. The IRS sets the income thresholds by filing status and adjusts them periodically. In other words, if you make too much money then a Roth IRA might be off the table unless you decide to do a conversion, as discussed earlier.³
• Conversions have tax consequences. Converting non-deductible traditional IRA contributions to Roth contributions doesn’t let you off the hook where the IRS is concerned. Even though you couldn’t deduct the contributions to your traditional IRA you still made them with pre-tax dollars. That means you have to pay tax on the money when you convert it to a Roth, which could lead to a hefty tax bill.¹⁰

Want to learn more about Roth IRA contribution limits? Find out more in our guide on starting a Roth IRA.

If you’re eligible to open a Roth IRA, you could take advantage of significant investment growth and tax benefits. Opening a Roth account is also pretty easy to do. You can choose a brokerage, fill out the paperwork, and set up an automatic contribution from your bank account each month to grow your retirement savings.

Remember, even if you’re only saving a little bit right now, time is on your side. Learn how to plan for retirement in your 20s and 30s so you can make the most of every penny.