With a Roth individual retirement account (IRA), you make post-tax contributions and can grow and withdraw the money tax-free if you meet certain requirements.
Roth IRAs also offer several other benefits that can help you save for your future and reach your financial goals.
1. Growth and withdrawals are tax-free
With traditional IRAs, your contributions are tax-deductible, but your contributions to a Roth IRA are made post-tax.
Because your Roth IRA contributions are taxed, your withdrawals aren’t taxed if you meet certain requirements. This means you can make tax-free withdrawals from your Roth IRA after the age of 59 1/2 and your first contribution was at least 5 years ago, or if you otherwise meet the criteria for a qualified distribution.
2. Withdraw contributions penalty-free at any time
Roth IRAs have a required minimum age and time since your first contribution before you can withdraw your earnings without a tax penalty, but you can withdraw your contributions at any time without penalty. Your contributions include any initial deposits you’ve made, while your earnings include any interest or other growth.
3. No mandatory distributions apply to Roth IRAs
RMDs (required minimum distributions) or mandatory withdrawals after a certain age do not apply to the original owners of Roth IRAs.
This is different from a traditional IRA, where distributions are required when you turn 72 (70 1/2 if you reached the age 70 1/2 before January 2020).
No RMDs mean that accountholders don’t have to withdraw money during market downturns and can let money grow for as long as they like.
4. No age limit for a Roth IRA
Roth IRAs don’t place age limits on contributions and distributions.
As of 2020, your age does not prohibit you from contributing to a Roth IRA or Traditional IRA. This can allow you to catch up on retirement savings, particularly if you start saving later in life.
5. Pass tax-free money to heirs
Because there are no RMDs while the original account owner is alive, Roth IRAs can also be efficient ways to pass money on to beneficiaries.
As with the original owner, beneficiaries’ withdrawals aren’t taxed. But keep in mind that if a beneficiary inherits your account, they may have to take required minimum distributions.
6. Easy access to your money
Roth IRAs can be more accessible than other retirement funds. If you’re 59 1/2 or older and your first contribution occurred at least 5 years ago, you can make withdrawals from your Roth IRA at any time without penalty.
There are some exceptions that allow you to make a withdrawal penalty-free before this age, such as withdrawing money for your first home or after the birth of your first child. If you are withdrawing for these purposes, you may be able to withdraw the money penalty-free, though not necessarily tax-free. It also depends on whether you’re withdrawing your earnings or your original contribution.
7. There’s no minimum income required
While Roth IRAs have maximum income limits for single and married filers (that change depending on whether one or both spouses are covered by a retirement plan at work), you can open a Roth IRA and contribute up to the maximum allowable amount if your income falls below those limits.
You must make “earned income” to contribute to a Roth IRA. This is income derived from some form of paid work, either independently or through an employer. If your income falls below the maximum allowable amount for a certain year, you can only contribute an amount equal to your income for that year.
8. You can have other retirement accounts
You can open a Roth IRA even if you already have a retirement account with your employer or if you already have another individual retirement account.
For employees who’ve opened a 401(k) or other type of retirement account with their company, a Roth IRA can be a great option to save even more for retirement.
At the same time, remember that Roth IRAs have income limits, and the income limits can change if your employer or your spouse’s employer offers a retirement account.
9. Your withdrawals won’t be penalized for certain expenses
While there is a 10% penalty on withdrawing your earnings from a Roth IRA before the age of 59 1/2, you can avoid this penalty if you’re making these withdrawals for certain expenses.
For example, if you’re purchasing your first home, you can withdraw a certain amount of your Roth IRA earnings without penalty (though you may still have to pay taxes). The same goes for some medical expenses, student loan payments and disability expenses.
10. Roth IRAs are easy to open
Opening a Roth IRA is a simple and straightforward process. As long as you meet the income eligibility requirements, all you have to do is provide the necessary personal documentation and paperwork and follow through on any other steps given by your broker or bank of choice.
Once you’ve done that, you can choose your investments or work with a trusted financial advisor to make investments for you.
Disclosure: This article is for educational purposes about banking products. It is not intended to provide legal, investment, tax, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should refer to the disclosures financial institutions provide for various products and consult a qualified professional.
