More Than a Retirement Tool: Roth IRAs

Reviewed: February 04, 2015
By FinanceWeb

The best Roth IRA is one that helps meet one’s investment goals; a Roth IRA is good for more things than retirement. The flexible tool was primarily the work of Senator William Roth. The flexible wealth building account was meant to mirror the pursuit of the American Dream. The vision included home ownership, a college education, and passing on the benefits of life’s work to children and loved ones. Americans can use the Roth IRA to buy a home, attend college, and build an estate.

Benefits to Survivors and Heirs

The best Roth IRA continues for as long as the investor wishes. Contributions can continue for a lifetime and assets remaining in the account can be designated to heirs without further taxation. The benefits of a Roth IRA can rollover to the account of a surviving spouse. For example, the heirs of a Roth IRA account holder can get the remainder of the funds without taxation. However, they must follow rules requiring a minimum mandatory distribution and take the funds starting within one year of death and completing within five years.

A Roth can Buy a First Home

The rules governing Roth IRA impose penalties for withdrawal of earnings prior to age 59.5. One can make a withdrawal of contributions at any time up to the full amount paid in without penalty. One keeps the full use of Roth IRA contributions. After five years, one can use the earnings in the account for limited purposes. One permissible purpose is to purchase a first home. The rules permit withdrawal of up to $10,000.00 for the purchase.

A Roth Can Fund Education Expenses

There is a college education exception to the rule against withdrawal of earnings from a Roth IRA. After five years of savings, one can withdraw money without penalty for college education expenses. It is a policy that recognizes the benefit to the individual and society from educational attainment. Account holders can use the education exception for tuition, fees, room, food expenses. One can use it directly, for a spouse, children, and grandchildren.

Roth IRA Investments

Investors realize the benefits of a Roth account by the quality and results of their investment decisions. When using low-risk investments like Certificates of Deposit or Treasury Bills, one has assurances of the return of principal and the agreed profits. Other investments such as high-rated corporate bonds, stocks, and municipal bonds carry some greater element of risk. A broker or fund manager will not make investments that are too risky. While some funds handle high-yield bonds, most prefer investment grade securities with a rating of BBB or better. Some investments such as foreign corporate bonds or real estate trusts will lack sufficient ratings.

A Roth IRA Permits Flexible Investments

There are occasions when investors decide to go outside of the usual investment territory. Some investors spy opportunities that would not fit inside the policy restrictions used by mutual funds. A feature of Roth IRA is that one can invest in a broad range of items. In the news, one finds sovereign debt of many oil exporting nations reduced by the rating services. For example, Fitch recently downgraded Russian debt to junk status. Also in the news, the oil price situation has affected many firms that operate or supply shale oil drilling operations in North Dakota and Texas. Some lenders and finance companies have organized rescue financing for these distressed firms, and they will acquire substantial interests in some companies and purchase assets of others. For some investors, these distressed or downgraded securities and interests are prime opportunities. A Roth IRA permits such investments.