A Roth IRA Lets You Take Your Money on Your Terms
When it comes to retirement planning, and setting future goals, having enough cash flow to live comfortably is often at the top of the list. One key toward that end may be to diversify a retirement portfolio so that funds aren’t all tied up in the same account. There are a variety of reasons someone may need to withdraw from their retirement account. Let’s look at why choosing a Roth IRA with no required minimum distributions may help safeguard your future.
How Does a Roth IRA Work?
A Roth IRA is a type of individual retirement account that an individual contributes to annually. From there, they can decide how funds are dispersed. Options include stocks, bonds or other investments. The main benefit to a Roth IRA is in paying taxes on your contributions now (as the average income increases) rather than in retirement. This can save thousands of dollars over the lifetime of the account. When it comes time for distribution after retirement, there are no tax penalties.
What Is an RMD?
An RMD, or required minimum distribution, is the amount that an account holder must withdraw each year after retirement. This applies to a traditional IRA but not to a Roth IRA, giving it a distinct advantage. This allows the account holder to continue to build wealth.
A Roth IRA or Other Retirement Account? How Do Their RMDs Compare?
While it’s wise to diversify retirement savings, each account typically has a pro and a con. Some of the most popular include:
- Roth IRA
- Traditional IRA
- Health Savings Account
Roth IRAs provide a huge tax incentive over all others by having minimal penalties and fees when accessed after retirement. By comparison, a traditional IRA has specific stipulations on RMDs and doesn’t tax the holder until the funds are distributed. A 401k does have an advantage if the employer offers a match-pay program. A health savings account (HSA) allows the account holder to save for medical expenses tax-free throughout the year and the main penalty is that the amount doesn’t roll over.
Beneficiaries and Estate Planning
With non-traditional IRAs, the account holder needs to start withdrawing from the account after age 70 ½. This is bypassed with a Roth IRA so a major benefit is that if the account holder passes away, the spouse won’t have to pay any RMD either. If the account holder has no spouse and the funds go to another family member, they will face minimum distribution penalties.
Being able to grow a nest egg without pre-tax penalties opens up a unique savings opportunity for the savvy investor. While each IRA has its own advantages and drawbacks, having one that allows the account holder to keep most of what they put in and access it on their own terms offers a unique flexibility the others just don’t give you.
When planning for retirement, consulting with a financial adviser is a wise choice. They can help ensure you are taking advantage of all the tax breaks available and making the most informed choices regarding your financial future.
~Here’s to Your Financial Health
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