3 Underrated Roth IRA Features Everyone Should Know About

If you're ready to save and invest for retirement, there are a number of different accounts you can choose from. If your workplace offers a 401(k) plan, you may be inclined to contribute if that feels like the easiest way to build a nest egg. And a 401(k) could especially make sense if your company matches a portion of your contributions.

If you don't have access to a 401(k), an individual retirement account (IRA) might be your next best bet. And in that regard, you could choose between a traditional IRA and a Roth IRA.

You may be aware that a primary benefit of saving for retirement in a Roth IRA is getting tax-free investment gains in your account, as well as tax-free withdrawals. But here are a few lesser-known Roth IRA features that could benefit you tremendously.

1. Flexible options for withdrawing money

The money you put into a Roth IRA comes from after-tax dollars. Because of this, the IRS is fairly lenient about when you can take withdrawals.

With a traditional IRA, removing funds prior to age 59 1/2 could result in an early withdrawal penalty equal to 10% of the sum you take out of your account. But with a Roth IRA, you won't be penalized for removing the principal portion of your account prior to age 59 1/2 since you never got a tax break on that money in the first place. It's only the gains portion where you risk paying taxes on your withdrawals prior to 59 1/2. And you may even be able to avoid those if your Roth IRA has been open for longer than five years.

Of course, you don't want to go around removing funds from your Roth IRA for any old reason, since you'd be taking away from your nest egg and limiting your future investment gains. But in a real pinch, the option to take those withdrawals penalty-free is pretty big.

2. No required minimum distributions

Traditional retirement accounts, like IRAs and 401(k)s, force you to start removing some of your savings in the form of required minimum distributions, or RMDs. RMDs begin at 73 or a bit later, depending on your year of birth.

The problem with RMDs is twofold: First, they create a tax liability because the sum you're forced to remove from your account is taxable income. But the other issue is that you're losing out on the chance to keep growing that sum of money in a tax-advantaged manner.

With a Roth IRA, you don't have to take RMDs at all. Even if you did, they wouldn't create a tax liability for you since Roth IRA withdrawals are tax-free. But by avoiding RMDs, you can continue to grow your money tax-free if you don't need funds to pay for retirement expenses right away.

3. Tax-free income for your heirs

Because Roth IRAs aren't subject to RMDs, it's easy to reserve some of that money (or all, if you so choose) for your heirs. The nice thing here is that you're passing along income that your beneficiaries can access tax-free.

Note that an inherited Roth IRA that's less than five years old may be subject to taxes on the gains portion. But otherwise, you could leave a completely tax-free legacy behind for the people you love.

It could be worth funding a Roth IRA for the tax-free investment gains and withdrawals alone. But these lesser-known rules could really make the case for putting your retirement savings into a Roth IRA.