5 Min Read | Published: May 29, 2024
What Are the Benefits of a Roth Individual Retirement Account (IRA)?
Discover the tax advantages and benefits of a Roth IRA. Learn why tax-free growth and contribution flexibility make it a valuable investment tool.
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
At-A-Glance
A Roth Individual Retirement Account (IRA) offers tax advantages, contribution flexibility, and estate planning benefits as well.
Maximum annual contribution and income limits for Roth IRAs are set by the IRS and vary from year to year.
In most cases, your heirs can make tax-free withdrawals from an inherited IRA as well.
Planning for retirement involves understanding various retirement account options. In this article, we’ll focus on the benefits of a Roth Individual Retirement Account (IRA), exploring the tax advantages, contribution flexibility, and estate planning benefits that IRAs offer. This information will empower you to make informed decisions for your retirement savings and eventual retirement distribution strategy.
How Roth IRAs Work
A Roth IRA is an individual retirement account opened and funded with after-tax dollars. Unlike traditional IRAs, there are no minimum distribution requirements with a Roth IRA.1 Account holders can make contributions and leave funds in the account for as long as they live. The IRS sets the maximum annual contribution rate. Check the IRS.gov website for the most up-to-date amounts for this year.2
Individuals can open a Roth IRA even if they already have a 401(k) account, provided their annual income doesn’t exceed the maximum eligible income limits set by the IRS. Those are updated periodically and can be found on the IRS.gov website.3 Taxpayers earning over the maximum income allowed by the IRS cannot contribute to a Roth IRA.
Benefits of a Roth IRA
There are a number of benefits of a Roth IRA, making it a good option for many people.
Here’s a look at some of the main benefits of these retirement accounts:
- Tax-Free Growth
Contributions to a Roth IRA are made with after-tax dollars, and the growth within the fund is tax-free. For example, if you contribute $6,500 a year for 35 years with a 6% return, your Roth IRA could be worth $724,326.4 Account holders are not required to pay income taxes on the principal or the gains.
- Tax-Free Withdrawals
Withdrawals from a Roth IRA are tax-free and penalty-free, as long as you have had the account for at least five years and are at least 59 1/2 years of age. (Other exceptions may apply as well)5 There are also no required minimum distributions (RMDs) for a Roth IRA, so retirees can choose to withdraw funds after taxable retirement accounts are depleted.
- No Age Limits
There is no age limit for contributing to a Roth IRA.6 Workers who choose to stay employed into their seventies can continue contributing as long as they want to. Retirees can use a Roth IRA for tax-free growth on any extra money they can set aside.
- No Required Distributions
A Roth IRA does not have required minimum distributions. The required minimum distribution age for Traditional IRAs and 401(k) plans was set at 73 by the Secure 2.0 Act of 2022.
- You Can Pass the Funds to Your Heirs Tax-Free
Your heirs won’t need to pay taxes on inherited Roth IRAs (in most cases), but they may be required to take minimum distributions.
Pros and Cons of a Roth IRA
Based on what you’ve already read in this guide, the benefits of a Roth IRA should be clear. We’ve summarized them below for your convenience, and we’ve included some potential drawbacks to give you a balanced perspective.
| Pros of Roth IRAs | Cons of Roth IRAs |
| Tax-free growth: Gains on a Roth IRA are not subject to income tax because contributions are made with after-tax dollars.7 | No tax deduction: Contributions to a Roth IRA are made with after-tax dollars. You cannot take a tax deduction for them.8 |
| No RMDs: There’s no required minimum distribution age for Roth IRAs. Account holders can keep them as long as they live.9 | Maximum income limit: Taxpayers who make over a certain amount of money are not eligible to open a Roth IRA.10 |
| Penalty-free withdrawals: Your own contributions can be withdrawn at any time without incurring a penalty. Earnings are also tax-free, as long as you have had the account for at least five years and are at least 59 1/2 years of age.11 | Withdrawal limits: Withdrawing earnings early will result in taxes and a penalty (exceptions apply).12 |
| Retirement fund diversity: Adding a tax-free Roth IRA to your retirement portfolio diversifies your retirement income stream. | Low maximum contribution limit: The IRS typically sets a low maximum annual contribution limit for Roth IRAs.13 |
Frequently Asked Questions
A Roth IRA is built using after-tax dollars, so distributions in retirement are typically tax-free. Traditional IRAs are built with pre-tax dollars, and income tax is due when funds are distributed. Both have pros and cons. Consider speaking with your financial advisor to learn more.
The Takeaway
Opening a Roth IRA to save for retirement creates tax-free growth on your contributed funds and tax-free distributions in your golden years. There’s no required minimum distribution age. You can withdraw your funds when you need them, keep contributing to fuel additional growth, or pass the funds tax-free (in most cases) to your heirs.
1,5 “Can I Have a 401(k) and a Roth IRA at the Same Time?,” Experian
2 “Roth IRAs,” Internal Revenue Service
3 “Amount of Roth IRA Contributions That You Can Make For 2023,” Internal Revenue Service
4 “Roth IRA Calculator,” Bankrate
6 “Retirement topics - IRA contribution limits,” Internal Revenue Service
7,8,9,10,11,12,13 “Roth vs. Traditional IRA: Which Is Better for You?,” Investopedia
Kevin D. Flynn is a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts, with his wife Evelyn, two cats, and ten wonderful grandchildren.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
Related Articles
Explaining 5 Key Types of Retirement Plans
Want to know more about retirement planning? Discover the different types of retirement plans and their tax advantages that help you save.
Is Withdrawing Retirement Funds Early a Good Idea?
There are several ways to withdraw from your retirement funds early. Understanding all the costs—today and for your future—can help you decide whether it’s right for you.
Tips for Making a Retirement Spending Plan
Retirement spending plans tell you what portion of your retirement savings you can spend each year. Here’s how to start a retirement spending plan of your own.
The material made available for you on this website, Credit Intel, is for informational purposes only and intended for U.S. residents and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
