Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

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

By Nicole Seghetti - Mar 15, 2014 at 6:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/09/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.