A Roth individual retirement account offers several important advantages that may make a Roth account preferable to other retirement savings options, including tax advantages, investment flexibility, and availability of emergency cash. To open a Roth IRA, you must have taxable wages, salary or tips from working. You can open a Roth IRA through a financial institution such as a bank, brokerage or fund company.
The biggest advantage of investing in a Roth IRA is that it will provide you with tax-free income at retirement. The trade-off is that you don’t get a tax deduction for Roth IRA contributions you make during your working years, but earnings on your contributions accumulate and compound tax-free. If you contributed $5,000 per year for 40 years and earned an average 8 percent on your contributions, you would have a tax-free kitty of $1.4 million at retirement. There are no taxes or penalties on distributions if you are over age 59 ½ and the Roth has been open for more than five years.
Another big Roth IRA advantage is that in a pinch you can withdraw your direct contributions at any time without tax or penalty -- but that doesn't extend to earnings. If you withdraw any earnings on your contributions before you turn age 59 ½, you will owe income tax plus a 10-percent early withdrawal penalty. IRS rules charge any withdrawals against contributions before charging against earnings, so you can withdraw up to the total of your contributions without incurring taxes or penalty. You also can take up to $10,000 from your Roth account without tax or penalty to put down on your first home, and in that case, the $10,000 can include earnings. If you are married and your spouse also has a Roth IRA, your spouse can also withdraw $10,000 for the house purchase.
A Roth IRA allows broad investing flexibility. You can invest in the stocks and bonds of individual companies, or invest through stock or bond mutual funds. You also can put Roth IRA money into exchange-traded funds, certificates of deposit, money market accounts, U.S. government securities, or real estate investment trusts. You can’t invest in whole-life insurance, precious metals, or collectibles such as coins, stamps, art, or antiques.
No Mandatory Distributions
Unlike a tax-deferred traditional IRA or 401(k), there is no mandate to start withdrawals when you turn 70 1/2. If you have other retirement resources, you can draw from them and leave earnings to build in your Roth account until you reach advanced old age, or you can leave your Roth account untouched to pass on to your heirs.