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5 Ways a Roth IRA Could Be Your Lucky Charm

By Charlene Rhinehart, CPA – Updated Mar 17, 2021 at 7:46AM

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This retirement account could be the key to unlocking your financial dreams.

If you want to crush your retirement savings and unlock incredible rewards on your journey, the Roth IRA (individual retirement account) is one of the most captivating options available. This saver's secret has built-in benefits that you can enjoy before retirement, and it can be key to living the life of your dreams during your senior years. 

Most people have no idea how versatile the Roth IRA is, so here's a snapshot of all the hidden treasures you can enjoy on your financial journey.  

Gold key with Roth IRA tag, with keyhole and cash.

Image source: Getty Images.

1. Gain access to tax-free income 

Unlike a traditional IRA, 401(k), and other popular retirement savings vehicles, the Roth IRA allows you to contribute money you've already paid taxes on and earn an unlimited amount of tax-free income and growth for use during retirement. 

Consider this: You consistently contribute the maximum amount to your Roth IRA and invest in assets that grow your portfolio to $1 million. After you reach 59 1/2 and have met the five-year rule, you can enjoy every cent of the $1 million in your account -- no need to share your earnings with the IRS. You can also invest in dividend-paying assets and earn a recurring stream of tax-free income in your Roth IRA. 

2. Withdraw contributions whenever you want 

One reason many investors fall in love with the Roth IRA is that you don't have to feel like all of your money is locked up forever. If you ever needed to use funds from your Roth IRA for an emergency situation, you can take out your contributions before you reach retirement age without penalty. In other words, you can always take out what you put in without sounding the IRS alarm. 

Let's say you contributed the maximum of $6,000 to your retirement account in 2019, 2020, and 2021. Your $18,000 contribution grew to $30,000 because you invested in top-performing stocks. You are eligible to withdraw the $18,000 whenever you want. It's the growth in your account -- the additional $12,000 you earned -- that would trigger taxes and penalties if you don't follow the rules.

3. Give your child a head start 

As long as you have earned income for the year and your income does not exceed thresholds, you can contribute to a Roth IRA. That means that your three-year-old daughter who earns money from acting and modeling can contribute to a Roth IRA account.

Here's the catch: The contribution to a Roth IRA account can not exceed earned income if it is less than the $6,000 contribution limit. In other words, if your daughter earns $3,000 for the year, the Roth IRA contribution is limited to $3,000. By contributing to a Roth IRA account at an early age, your child can take advantage of the power of compounding and become a millionaire before retirement

4. Enjoy a special catch-up contribution if you're 50 or older

Don't fret if you didn't get to take advantage of the Roth IRA when you were younger. The IRS provides a $1,000 IRA catch-up contribution for savers age 50 or older. Instead of the $6,000 contribution limit, older savers can contribute up to $7,000 in 2021 to supercharge their retirement portfolio. 

Remember, there are no age restrictions, so a 75-year-old who has earned income can still contribute to a Roth IRA. But if a person's income is too high, they may not be eligible to make a direct contribution to a Roth IRA. 

5. Earn extra credit for saving 

The IRS rewards low- and moderate-income individuals who save for retirement with a Saver's Credit up to $1,000 (up to $2,000 for a married couple). Since the Saver's Credit is nonrefundable, it will only reduce your total tax bill to zero, but this is perfect if you're worried about covering your tax tab at the end of the year. 

The exact amount of the credit you will receive for contributing to your Roth IRA is based on your filing status and adjusted gross income (AGI). If you qualify for the Saver's Credit, this is one situation when contributing to your Roth IRA pays off in the short run as well as long-term.

Tap into your lucky charm 

Let's not forget that you can even use the Roth IRA to fund your education or purchase a home. There's a Roth IRA exception that allows you to bypass the 10% withdrawal penalty if you use the funds to pay for qualified education expenses. You're also eligible to use up to $10,000 of earnings (lifetime limit) to build, rebuild, or buy a home without worrying about penalties or taxes.

The Roth IRA comes with exclusive benefits that make saving for retirement a bit more rewarding. If you qualify, consider maxing out your account and investing in high-quality assets so you can unlock the full benefits of the Roth IRA.  

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