To go along with the latest Roth IRA Movement, I’m sharing a few little known facts about the benefits of having a Roth IRA.
The Roth IRA started with the Tax Relief Act in 1997, but as demonstrated by the this latest craze, many people still don’t know much about them.
I am all about “practicing what I preach” and in this case, I’m no different. I have two separate Roth IRA accounts, and hope to max out my contributions once I become completely debt free.
I strongly believe in having a Roth IRA, and it will be a decision you won’t regret. Below are 5 little known facts about investing in a Roth IRA.
1. You might be eligible for a Saver’s Credit
Unlike all other retirement accounts, contributions to a Roth IRA are made with after tax dollars, which means you won’t be able to get an immediate tax benefit. However, (depending on your income) you might be eligible for a different credit called the Saver’s Credit.
It’s basically a credit you get on your income tax return for contributing to any qualified retirement plan, like a 401(k), SIMPLE, SEP or any IRA. The credit is based on a percentage of your total contribution, so the amount varies for each taxpayer.
2. Any current retirement account can be converted
If you work for a small business or company that doesn’t offer 401(k) or IRA plans, you can still participate and convert them over to a Roth. I did this in 2009 with an employer funded SEP plan.
But be careful to do your research first (or ask a professional for help) if you’re converting a tax-deferred plan to a nondeductible one. I had to pay taxes on the amount I converted, just like it was income. You definitely want to be sure to do this in a year you make less money, or can afford the higher taxes.
3. It can be used as a back-up savings account
In general I like to keep my finances simple. The best accounts are for savings, investment accounts are for investing and so on. But sometimes, a Roth IRA can be used as a back up emergency fund or savings account if needed.
Since you already paid taxes on the money you put into the account, you can enjoy tax free distributions before you reach retirement age.
Of course there are a few distribution requirements that you need to meet. But it can be used for things like saving for a down payment on your first home, or your kids college education.
4. It’s not taxable when passed to heirs
If you want to keep your Roth IRA and pass it on to your kids or other relatives, they will inherit it and not have to pay any taxes. For large estates and people with lots of assets, this is one of the best benefits of having a Roth IRA.
Here in Texas I work with oil & gas title all day long, so I see first hand why this is very advantageous for everyone involved. Some parents/grandparents even open up Roth IRA’s for their kids when they’re born. Just like with a 529 college plan.
5. The dividends and earnings grow tax-free
Yes, that’s right. Until Congress decides to take away this “too good to be true” benefit, all the earnings and interest you earn within your Roth IRA is completely tax-free! You won’t have to pay taxes on dividends earned or have to worry about capital gains taxes. How awesome is that?!
If you want to read more about opening a Roth or the investment details, check out my Beginner’s Guide to a Roth IRA.