I love celebrating the holidays with my family and friends! There is always so much fun to be had with the Taylor family, especially because my favorite human, Cecilia Taylor, is coming home for Christmas. The Taylor family has many traditions that I love being a part of watching sneakily from across the room, like decorating gingerbread houses and cooking Christmas dinner together.
However, my favorite holiday festivity occurs when the Taylor’s assemble and decorate something called a “Christmas Tree.” The “Christmas Tree” tradition is by far my favorite because it is when the Taylor’s assemble a giant scratching post for me and then attach lots of little sparkly balls to it!
I tell you this anecdote because initially, I wanted to fully embrace the spirit of giving by mailing you all Christmas Trees to scratch! However, my 2nd favorite human, Debbie Taylor, informed me that this idea was “ridiculous” and “impractical” in “too many ways to name” (and also that the FexEx bill would be enormous). Therefore, I have decided to embody the spirit of giving by writing an article on the 3 main benefits of a Roth IRA!
What is a Roth IRA? What are the differences between a Roth IRA and a traditional IRA?
Very simply, the biggest difference between a Roth IRA and a Traditional IRA is when you are taxed. With a Traditional IRA, anyone under age 70 ½ with earned income can make contributions of up to $6,000 per year ($7,000 per year if the person is over 50) that are often fully tax deductible. However, withdrawals from Traditional IRAs are taxed at ordinary income tax rates. In comparison, with a Roth IRA, contributions to the account are made after-tax (so taxes have essentially already been paid) and withdrawals from the account are not taxed.
- Tax Advantages of Roth IRA’s and no RMD’s!
Withdrawals from traditional IRAs are taxed in retirement, however, by paying taxes at the front end, owners of Roth IRAs receive tax free growth on their investments. That type of compounding can be very powerful over several decades. In addition, because there are no RMD requirements for Roth IRA’s, the accounts are able to grow tax free for longer periods of time. And, when you take distributions, you will not trigger Medicare surcharges or other additional taxes because the Roth distributions are tax free.
- Fewer Withdrawal Penalties with Roth IRA’s
If you withdraw money from a traditional IRA before age 59 ½, you will likely be subject to an early withdrawal penalty plus taxes. However, with a Roth IRA, contributions may be withdrawn at any time without penalties or taxes (before age 59 ½). If the account is less than five years old, earnings may only be withdrawn early without penalty or taxes under certain circumstances. If the account is five years or older, some circumstances will result in taxes, but no penalty.
- Roth IRA’s may be Better for Heirs
With traditional IRAs, heirs are required to take withdrawals and then they are required to pay taxes on those withdrawals. However, with Roth IRAs, heirs can withdraw money tax-free and there are no required minimum withdrawals for surviving spouses.
In conclusion, I hope that you enjoyed learning more about the 3 main benefits of a Roth IRA. If you would like to talk about whether a Roth IRA would be right for you, please feel free to contact the Taylor Financial Group team for assistance.
Till next time,
“This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. To qualify for the tax-free and penalty-free withdrawal on earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.”