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7 Reasons Everyone Needs a Roth IRA

Do you have a retirement such as a Roth IRA?

A retirement account gives you an opportunity to grow your money tax-deferred. In other words, you can grow your account with income from interest, dividends, and capital gains that can compound each year without taxes eating away your earnings.

The early you open a retirement account, the greater your saving potential because you have compounding on your side. 

The most common type of retirement account out there is a Roth IRA, which is a tax-advantaged retirement plan. With this account, you are taxed once you make a contribution. But you don’t pay any taxes when you withdraw at retirement. Whereas when you make a contribution to a traditional IRA or a 401(k), you don’t pay taxes on that income initially; you pay taxes when you withdraw money in retirement.

Anyone who is working can contribute up to $5,500 (the maximum 2017 contribution) to either a Roth IRA or traditional IRA. If you are 50 years old or older, the total amount you can contribute is $6,500. While the annual $5,500 or $6,500 limit may not seem much, you can grow your savings significantly in the long run.

For example, if you can contribute the annual limit of $5,500 at a 6% interest, at the end of 20 years, you could have $214,460 in your account.

A Roth IRA account is easy to open. You can open it at your bank or a brokerage firm, with a mutual fund company, such as Vanguard.

Here are some reasons why everyone needs a Roth IRA.

1. There is No Age Limit to Open a Roth IRA or Contribute to It

There is no age limit. You can be 15 or 90 years old and still can open and contribute to a Roth IRA. As long as you are earning an income, you can open one and contribute to it. However, you may be limited by how much you can contribute depending on your adjusted gross income (AGI).

To contribute the $5,500 annually, or the $6,500 if you are 50 or older, your income (in 2017) must be less than $133,000 if you are single or $196,000 if you are married filing jointly.

See how to allocate your assets to boost your retirement savings.

2. You May Not Have a 401(k)

If you don’t have a 401(k), it is good idea to open a Roth IRA. Not all employers offer a 401(k) plan at work. A 401(k) plan is another tax advantaged retirement account, where you contribute a certain amount of your salary to a retirement account that your employer set with an institution. This contribution is deducted from your paycheck. In many cases, your employer will match dollar for dollar or 50 cents for each dollar the employee pays in.

But your employer may not offer a 401(k) plan, or you may be a part-time employee. With a Roth IRA, however, everyone can open one as long as they are earning an income.

3. You Can Open a Roth IRA Even if You Have a 401(k) or a 403(b)

The great thing about opening a Roth IRA account is that there is no employer-plan restriction. You can contribute the annual maximum (in 2017, that’s $5,500 or $6,500 if you are 50 or older), even if you are already have an employer retirement plan such as a 401(k) or a 403(b).

4. You Can Contribute to a Roth IRA Forever

With a Roth IRA account, you are not required to take money out of it at age 70, as you are with traditional IRA. You can simply leave the money in the account. You can also make contributions after age 70 if you wish to do so. This gives you the opportunity to invest tax free for a longer period of time since you are not required to withdraw money–ever.

See how to allocate your assets to boost your retirement savings.

5. All Withdrawals Made after 59 1/2 will be tax free

According to the Roth IRA rules, as long as you are 59 1/2 or older and have owned your account for 5 years, you can withdraw money when you wish to and you won’t pay any taxes.

6. You Can Withdraw in Case of an Emergency

It is never a good idea to withdraw money from your retirement. The reason is because by doing so, you may lose on the opportunity to earn on dividends, interests, capital gains, etc… But in case of an emergency, you can use your Roth IRA account as a savings account.

You withdraw whatever you contributed tax-free and penalty free. However, you may not withdraw your earnings. In other words, if you withdraw more than you have contributed, you will be subject to both taxes and penalties on the earnings portion of the withdrawal.

In comparison, withdrawal of your traditional IRA contributions before age 59 1/2 will result in a 10% federal penalty and regular income tax on the entire withdrawal.

7. You Have More Investment Options

A 401(k) plan may have very limited investment options for you to choose from. With a Roth IRA, however, you can pick from a larger range of investment choices than what’s offered by your 401(k) retirement plan.

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