Five Interesting Facts About Roth IRAs

These funds help build wealth while providing flexible contribution and withdrawal options

1/31/2014 10:00:00 AM
Roth IRAs are an increasingly popular way to grow wealth and prepare for retirement while steering clear of withdrawal penalties, and for good reason. Here are five interesting facts about Roth IRAs that you may not have heard before.

Contributions are Made with After-Tax Dollars

Contributions to Roth IRAs, unlike a traditional IRA (or individual retirement account), are made with after-tax dollars. While this doesn’t offer an immediate tax benefit, fund owners are winners in the long run. Contributions may be withdrawn at any time, without penalty and, if you are over age 59½ once a five-year waiting period has expired, earnings on those contributions can also be withdrawn without penalty.
“When you take a qualified distribution from your Roth IRA, you will never pay taxes on that money,” explains “This allows you to have access to your contributions at any time. That’s an attractive feature for those that want to save for retirement, but are worried about having to pay a penalty if they need access to the money.”

There is No Age Minimum

Retirement planning is best accomplished early in one’s career, which makes a Roth IRA a good idea for people of any age. And, as states, it is “super-easy” to open a Roth through your local financial institution.

Roth IRAs Provide Great Flexibility

In addition to flexible withdrawal rules, Roth IRAs allow for more flexible contributions than other 401k accounts. While there is a total contribution of $5,500 in 2013, (with a $1,000 catch-up contribution if you are over age 50), yearly limit on contributions, money can be deposited into a Roth IRA “right up until tax day” of the year following the opening of the account, notes Kiplinger.

Significant Savings is Possible

“The idea of saving on your taxes may seem a tad obscure, but it really can pay off big,” notes Kiplinger. “If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of eight percent on her investment, she'll have $1.4 million saved by the time she retires at age 65. And the money is all hers—she won't have to give the IRS a cent of it if she waits until retirement to withdraw the money.”

They’re for More Than Just Retirement

Roth IRAs build financial security for more than just retirement. Rules allow the withdrawal of up to $10,000 per person ($20,000 for a couple) toward the down payment on a house, so long as the account has been open for five years, and many people withdraw money to assist with educational payments.
 “The Roth shouldn't be used as the sole savings vehicle for higher education, but it's nice to know you can use it if you need it,” explains Kiplinger, which recommends Coverdell or 529 plans as intelligent college funds.
With this kind of flexibility and wealth-accumulation potential, Roth IRAs have a lot going for them, so it’s no surprise that they continue to grow in popularity, earning more contributions in 2011 than any other type of IRA, according to the Employee Benefit Research Institute.

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