Benefits of a Roth IRA
A Roth IRA can be a terrific savings option for those currently in or entering the workforce. In this type of retirement account, contributions are made after-tax. This differs from a traditional IRA or 401K that most companies offer because retirement contributions are taken out of your paycheck before taxes are accounted for. This means that when retirement time rolls around, taxes are owed on withdrawals.
By contributing on an after-tax basis to a Roth IRA, your earnings will grow tax free. Withdrawals can be taken out tax free as well (as long as your age is 59.5 or older and have met the minimum account holding period of 5 years). Paying taxes on retirement savings sooner rather than later can be beneficial for certain individuals, depending on what tax bracket you might fall into at retirement. If you file taxes as a single person, your Modified Adjusted Gross Income must be under $161,000 for tax year 2024 to contribute to a Roth IRA. If you’re married and file jointly, your Modified Adjusted Gross Income must be under $240,000 for tax year 2024.
Unlike traditional IRAs, Roth IRAs do not subject the account owner to mandatory withdrawals called Required Minimum Distributions or RMDs. If the account has met the 5-year minimum holding period, there are no income taxes for inherited Roth IRAs. Heirs can withdraw from the account tax free and will benefit from not paying additional taxes.