Many people know that a Roth IRA has all sorts of benefits. And of course, many people point to the fact that it’s a tax-advantaged account that allows investors to “front-load” the paying of taxes early on. But how does it work, and what are the specific benefits of using a Roth IRA? Below, we’ll go into deeper detail into a Self-Directed Roth IRA:
- Tax-free earnings and no taxation on withdrawals. The most obvious benefit of the Self-Directed Roth IRA? The fact that once you use it to make an investment, you can enjoy a level of tax-free growth that is simply impossible with the other accounts. Investing with a Roth IRA means you’re putting post-tax dollars into the account. And by doing this, you are essentially paying the taxes upfront. As the money in the account grows, you will not owe additional taxes on the growth. And once you hit retirement age, you are free to take withdrawals from the account or simply keep reinvesting the funds as there are no taxes on withdrawals made after you turn 59 and a half years old.
- Independence from an employer-sponsored plan. Let’s say an investor already has a 401(k) through their place of work. What about additional help with retirement? An investor can independently sign up for a Self-Directed Roth IRA and immediately begin enjoying its benefits, including the ability to choose from a wide variety of investment types. This includes everything from real estate to precious metals. This provides an account that’s easy to keep; after all, it’s your account, in your name.
- Additional access to savings. Because the taxes on the contributions that you make to a Roth IRA are already paid, you don’t have to worry about paying taxes when you take contributions out of a Roth IRA. There are penalties associated with taking the growth out of a Roth IRA early, but when it comes to the contributions you make directly to the Roth IRA, you’ll have more flexibility. This helps people to feel confident that even as they invest, there are still emergency options that can benefit them down the line if they have to rely on it.
- Counting on a tax rate that may be higher than your current tax rate. If you start investing with a low income, the money that you could owe on your retirement income later in life is potentially higher as you enter higher tax brackets. We recommend that you seek out the advice of a tax advisor to learn more about this. But for many people who successfully calculate whether their income will be higher upon retirement, a Roth IRA can be a way to save money in a legal, legitimate way.
- No required minimum distributions. Perhaps one of the most unique quirks of the Roth IRA? You don’t have to begin taking minimum distributions after a certain age. Typically, because many accounts are before-tax, the IRS will require minimum distributions to ensure that taxes eventually get paid on the retirement account in question. But with a Roth IRA, because the taxes are paid upfront, there’s nothing to collect on. That means that you can keep the Roth IRA full of investments as long as you want, assuming that you don’t need the money. This gives you more flexibility in designing a retirement plan that’s appropriate for your specific situation.
Want to know more about Roth IRAs? You can read all about them at our guide to Self-Directed Roth IRAs here at American IRA. Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.