One of the biggest attractions of having a Roth IRA account is the notion of depositing funds into the account and never having to pay taxes on the money or its subsequent gains ever again. Roth IRAs are also becoming increasingly popular among employers with approximately 50 percent of 10 million surveyed employers now offering a Roth 401(k) plan. The following five advantages are other compelling reasons to consider a Roth account.
Contribute More Wealth to Tax Sheltered Accounts
Money that is deposited into a traditional IRA will eventually be taxed while funds that are deposited into a Roth account will not be taxed at a later date. Both Roth and traditional IRAs are subjected to the same annual limits. However, Roth account holders can ultimately expect to hold onto their entire balance upon future withdrawal while money that is kept in a traditional IRA will ultimately lose 15 percent of its value due to taxes. Therefore, contributing more money to a Roth can be considered a safe way of sheltering more wealth from taxes with minimal risk of raising red flags and potentially triggering an IRS audit.
Greater Benefits More During a Tax Increase
Because money that used to fund a Roth account is taxed in the beginning, Roth savings are not affected by subsequent tax increases. However, pretax savings are taxed at the current rate upon withdrawal. Tax rates are currently lower than they have been for much of U.S. history; therefore, opening a Roth account now can translate to far greater savings in the future.
More Options to Reduce Retirement Taxes
Having a pretax and a tax-free account can make more options available should tax complexities arise during retirement, as they oftentimes do. Ideally, a senior would like to first withdraw the money they have saved in taxable and Roth accounts to delay paying taxes on funds in pretax accounts. However, if a senior’s pretax account balance grows to the extent of triggering required minimum distributions, those distributions could move the taxpayer into a higher tax bracket. Being able to divide money between pretax and tax-free accounts allows for more flexibility.
Extra Motivation to Save
Paying taxes up front can cause Roth account balances to appear to be lower when compared to pretax account balances. The appearance of a lower balance can have the psychological effect of motivating taxpayers to work harder to save and avoid frivolous spending.
Possibility of Early Withdrawal
Roth account holders have the possibility of withdrawing money early without penalty after five years if their employer offers the option of in-service withdrawals. While there are ways of tapping into pre-tax accounts early, there is often a 10 percent penalty for doing so.
To learn more about the advantages of opening a Roth account, contact Gary Kaplan, CPA and Certified Specialist in Retirement Planning. His firm is qualified to help individuals from virtually all walks of life plan for retirement.
