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The Roth IRA’s Secret Tax Benefits That Everyone Should Know

The Roth IRA’s Secret Tax Benefits That Everyone Should Know

August 27, 2021
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1. Tax-Free Withdrawals

Money that goes into a Roth IRA is after-tax dollars. Because you've already paid taxes on that money, once it is withdrawn, it comes out tax-free. There are some restrictions on those withdrawals if you want to avoid penalties and taxes. But keep in mind, you can withdraw your contribution at any time, tax-free.

You'll need to wait until age 59 ½ or for the Roth IRA to be at least five years old before you can withdraw any earnings penalty and tax-free. But again, you can withdraw your contributions at any time tax-free.

2. Earnings Grow Tax-Free

The great thing about a Roth IRA is that any growth is tax-free—any earnings on your contributions will be tax-free. It doesn’t matter what you invest in. Potential growth on those investments will be tax-free. Once you meet the above two conditions, withdrawals of earnings will be tax-free as well.

3. Withdraw Early Penalty-Free

You can withdraw contributions from a Roth IRA before 59 ½, both penalty-free and tax-free. If you need those funds, they’re available. It’s almost like having an emergency fund. 

You can also withdraw contributions tax-free before the account is five years old.

4. 50 And Older Can Contribute More

For those who are 50 or older, you can contribute more to your Roth IRA. The 2021 contribution limit is $6,000 per year. But for those who are 50 or older, that limit gets bumped up to $7,000. The additional $1,000 is called a catch-up contribution.

5. Contribute Anytime

It doesn’t matter what age you are – you can contribute to a Roth IRA at any age as long as you have earned income. Because any earnings on your contributions will be tax-free, it makes sense to keep contributing to your Roth IRA.

Other Benefits Of A Roth IRA

Here are a few additional benefits of the Roth IRA:

  • If you have a disability, the five-year minimum and 59 ½ age penalties for early earnings withdrawal do not apply.
  • The early withdrawal penalty does not apply for first-time homebuyers ($10,000 maximum of earnings).
  • There are no required minimum distributions on a Roth IRA.
  • Early withdrawal penalty does not apply for beneficiary or estate on account of the IRA owner's death.
  • You can open a Roth IRA virtually anywhere (online brokerage, bank brokerage, established brokerage, etc).

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

If you’d like to discuss further, contact the office.

A Roth IRA offers tax free withdrawals on taxable contributions.  To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.