5 Little Known Facts About a Roth IRA

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 Your 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.

Photo Credit: Invesment

Money Rules by Jean Chatzky
Investing Made Simple: A Beginner’s Guide to a Roth IRA
About the author: Carrie Smith is the financial artist and owner of Careful Cents, a site that helps creative freelancers discover the art of making a living. In May 2013 she quit her full-time accounting job to pursue entrepreneurship and blogging. Since then she’s been featured in sites like The Huffington Post, Glamour Magazine, and Kiplinger Finance. In her spare time she enjoys painting, sketching, and making food with her chef husband. You can connect with her in real time on Twitter or Instagram: @carefulcents.

4 Comments... Read them below or add one of your own

  • Amanda Abella March 29, 2012, 8:54 am

    Yes! I opened up my Roth IRA about a year ago and it’s definitely a decision I don’t regret! I try to encourage my readers to do the same – they’re young so they should reap the benefits!

    Great Post! 

    • Carrie Smith March 29, 2012, 9:46 am

      That’s awesome Amanda! I definitely agree with you, starting when you’re young like we are, will always be a good decision. And comes with great benefits!

  • Chris April 13, 2012, 1:36 pm

    I have a single Roth IRA account, so what would be the purpose of having two separate Roth accounts since contributions overall to all accounts are capped a certain amount?

    • Carrie Smith April 14, 2012, 11:21 am

      For myself personally, I just like to have an expert financial advisor to call on for help and guidance if I need it. But since I do consider myself a “financially savvy” person, I like to learn and understand the investing/Roth IRA process. This is where I like having an online account like Betterment (or Scott Trade etc) to help me DIY. 

      Other methods work for other people. And yes, I agree with your point, that you don’t always need multiple vehicles to get to your destination. Thanks for the comment Chris.

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