3 Enticing (Yet Lesser-Known) Reasons to Consider a Roth IRA

Tax-free growth potential and tax-free withdrawals are just two benefits of a Roth IRA. Here are three lesser-known advantages.

Mar 15, 2014 at 6:30PM

Want to boost your retirement savings and lower your taxes? A Roth IRA is a way for investors to do just that. But tax-free growth potential and tax-free withdrawals are just two benefits of a Roth. Here are three lesser-known advantages.

1. Use your contribution dollars at any time
We typically focus on the saving and investing aspects of Roth IRAs. But a Roth IRA enables you to take out 100% of what you've contributed at any time and for any reason, with no taxes or penalties. Only earnings in the Roth IRA are subject to restrictions on withdrawals. A distribution of earnings from a Roth IRA is tax-free and penalty-free if the account has been owned for five years and at least one qualifying condition is met. However, distributions of earnings are taxable if one of these conditions is not met and the five-year holding requirement hasn't been satisfied.

2. No required minimum distributions
Unlike Traditional IRAs and employer-sponsored retirement plans, Roth IRAs do not impose required minimum distributions, or RMDs, during the lifetime of the original owner. If you don't need your RMDs for essential expenses, they can be a nuisance. RMDs must be calculated each year and result in taxable income. Also, if you miss taking one, you'll incur a hefty penalty. Owning a Roth IRA gives you piece of mind knowing you don't have to deal with RMDs.

3. Leave tax-free money to heirs
Because Roth IRAs don't require RMDs during your lifetime, these accounts could potentially grow larger over the years and be passed on to your heirs. But carefully consider the pros and cons before trying to use a Roth IRA for your estate planning. For example, if you plan to leave your retirement savings to your heirs, consider how it may affect their taxes. RMDs from inherited Traditional IRAs generate taxable income for heirs and could push them into a higher tax bracket. If your heirs' income tax rates are expected to be lower than yours, they may be better off inheriting a Traditional IRA rather than a Roth IRA. Also, note that while RMDs are required for inherited Roth IRAs, those distributions generally remain tax-free. Be sure to consult an estate planning attorney before attempting to use Roth IRAs as part of an estate plan.

Foolish takeaway
Do these lesser-known reasons for owning a Roth IRA entice you? If so, you have until the April 15 deadline to contribute $5,500 (or $6,500 if age 50 or older) to a Roth IRA for 2013. Not everyone can contribute to a Roth IRA because of income limits.  But you still may be able to convert an existing Traditional IRA or other retirement savings account into a Roth.

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Follow Nicole Seghetti on Twitter, @NicoleSeghetti. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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