5 Reasons to have a Roth IRA

Reviewed: December 16, 2014
By FinanceWeb

There are many good reasons to have a Roth IRA; it is a retirement arrangement in which annual contributions build retirement wealth and financial security. It offers advantages not found in other retirement provisions such as the ability to make contributions during the entire lifetime. Unlike Social Security and many pension programs, unused funds remain in the account and become part of the individual’s estate. One can use the funds paid into a Roth plan at any time, and this is another source of investment flexibility. A Roth IRA is an important source of financial growth, and it offers investment flexibility.

Tax Free Income for Retirement

A Roth IRA is an excellent method to add resources for retirement. An individual’s contributions to an IRA are taxable, but the earnings on the contributions are tax-free. Over the course of many or even a few years, the contributions will generate interest, compounding, and investment income. One can take all of the earnings as tax-free income after age 59. Taxes are an important consideration when planning for retirement income and one must account for them when determining expected spending levels in retirement. The tax-free income from a Roth account is an important advantage; it reduces overall taxation when combined with taxable sources of retirement income. In the event of future federal tax increases, the tax-free income from a Roth IRA will reduce the impact of higher tax rates.

Annual Contributions Build Retirement Security

The annual contributions limit is $5,500 for 2014 and 2015. Account holders aged 50 or older can add a further sum of up to $1,000 per year for catch-up. Growth in a Roth IRA comes from savings, interest on the savings, compounding, and investment income. Adding the authorized limits on a yearly basis will accumulate a significant asset. Interest and compounding will increase the contributions. Roth IRA is an excellent vehicle for investment, and it is an important part of a comprehensive investment strategy. One can withdraw contributions to a Roth plan at anytime without penalty.

Roth IRA Investments

Roth IRA permits freedom to invest. One can choose foreign or domestic sources and a wide range of investments beyond stocks and bonds such as real estate. Many investment companies reach out for IRA accounts offering attractive terms for mutual funds including low entry amounts. They also offer automatic payment arrangements from bank accounts to make regular progress towards achieving the annual maximum contribution. Open investment options offer flexibility and will mesh with a variety of investment strategies. Prior to retirement, one might pursue equity growth, and after retirement one might put greater emphasis on income.

Roth IRA and Investment Strategies

Account holders can integrate their Roth plan into a comprehensive investment strategy. Because it is flexible, one can invest with a view towards changing goals and economic circumstances. A balanced portfolio must take into account the economic environment and work through changes. In the U.S., the current economy is in a period of low-interest rates that might favor bond investments over stocks. Given low bank interest rates, income funds and high dividend stocks offer advantages for balancing the portfolio. Cash profits enable financial flexibility that one can lose with long-term bond positions.

Lifetime Contributions

The term of contribution is another advantage, and a point of difference with other retirement arrangements. Account holders can invest in Roth accounts past age 70. There are no limits to the term of contribution. There is a distinct trend among the Baby Boom generation to extend the work tenure by adding part-time or consulting work instead of full retirement. A Roth retirement arrangement works well with this style of phased retirement; account holders can continue building retirement wealth past the retirement age. One can use tax-free funds from a Roth IRA to benefit heirs; it is a powerful tool for estate planning.