Top Ten Reasons To Own A Roth IRA

by Hank Coleman

Here is a quick list of my favorite reasons to own a Roth IRA. Of course, there are many more, but here are the top ten reasons to own a Roth IRA.

Top Ten Reasons To Own A Roth IRA

1. Tax free withdrawal of earnings in retirement – This is by far the largest benefit of a Roth IRA. Once you reach 59 ½ years-old, you can begin withdrawing your earnings from your Roth IRA accounts tax free.

2. No minimum or maximum age limits to contribute – As long as you have an earned income and are within the income limits, you can contribute to a Roth IRA. This is a great deal. If your children have a job like a paper route, babysitting, or mowing lawns, they can open a Roth IRA. Starting while still in middle or high school can add millions of dollars to their retirement nest egg.

3. No mandatory minimum withdrawals – Unlike Traditional IRA and 401k retirement plans, there is no required mandatory distributions at a certain age for a Roth IRA. Roth IRA investors can wait to start withdrawing money from their accounts, and ultimately they do not even have to withdrawal any money if you do not want to or need to.

4. Early withdrawal for first time home buyers – You can withdrawal earnings from your Roth IRA without a penalty for a first time home purchase.

5. Early withdrawal for education expenses – You can withdrawal earnings from your Roth IRA without a penalty for valid educational expenses.

6. Can withdrawal penalty free if disabled – if you become permanently disabled, you are allowed to withdrawal earnings from your Roth IRA without a penalty in most cases. Be sure to check with your investment company and a tax advisor before you do so though to be sure.

7. 16 months to contribute – You can contribute for the previous year (2011) all the way up to tax day of next year (April 17th, 2012). Finishing my contributions to my Roth IRA is one of my favorite things to do with my income tax refund.

8. Catch up contributions – If you are over the age of 50, you can add an extra $1,000 as a catch up contribution to your Roth IRA for a total contribution of $6,000 per year per person.

9. Tax free withdrawals any time of your contributions – While it is not the best idea to withdrawal money from your Roth IRA before retirement, it is a safety net available for investors. Your contributions to a Roth IRA is your money to do with as you see fit which also includes withdrawing it if needed without penalties or having to pay taxes on it again. This of course is not recommended by financial planners, and it is not what a Roth IRA was designed for. It is a retirement plan and not a savings account or emergency fund.

10. Can pass Roth IRA onto heirs – A great benefit of a Roth IRA is that you can leave them to your heirs by completing a beneficiary designation form with your investment company. Your spouse can keep your Roth IRA for as long as he or she lives, and other non-spousal heirs can keep your Roth IRA for up to five years before distributing the assets.

Are there any other great reasons that I missed? I know that there are tons of great reasons out there to own a Roth IRA. I’d love to hear your thoughts in the comment section.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and is currently pursuing his Certified Financial Planner credentials. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 525 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 12 comments… read them below or add one }

Zack Jones

Please explain #7 a little more. How are you able to make a contribution to your Roth for tax year 2011 after you’ve already filed you 2011 taxes? I’m assuming you don’t have to report your contributions on your income taxes?
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Hank

You’re correct. You do not have to report your Roth IRA contributions on your taxes unless you are a low income earner and are collecting the Savers Credit, formally known as the Retirement Savings Contributions Credit (tax credit). http://www.irs.gov/newsroom/article/0,,id=107686,00.html

If you can claim the Savers Credit and have already filed your 2011 taxes, you can always file an amendment to your taxes. But, Roth IRAs allow you to continue to contribute your $5,000 or $6,000 in your case for last year all the up to tax deadline day (April 17th because of the weekend this year.)
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Jai Catalano

I also look at it like money I can’t touch. I mean I know I can touch it but it helps to know that it is growing and I am not touching it.
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Hank

It’s kind of like a built in savings account that is harder to touch than simply going to the teller counter with a withdrawal slip.
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Elizabeth @ Simple Finance

I am a huge advocate of the Roth. My husband actually has a Roth 401(k) – I didn’t think they actually existed, but his employer puts a certain percentage of my husband’s salary into a separate IRA. It’s immediate diversification!
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Newlyweds on a Budget

I have a Roth IRA, now I just need to actually contribute to it!
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MyMoneyDesign

I’m a big promoter of Roth IRA’s. This is a great and easy presentation of the benefits. By their own rite, each of them is beneficial. I personally got into a Roth on the principle alone that if I ever needed the money back I could get it (after 5 years) (but I probably won’t ever touch it).

You did leave out one of my favorite reasons to pick the Roth over the Traditional: You have a higher effective savings rate! I have a post of my own where I work out the math:

http://www.mymoneydesign.com/personal-finance-2/retirement/traditional-vs-roth-ira-%e2%80%93-part-3-why-i-prefer-a-roth-ira/
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Brent Pittman

Ah Yes, the ROTH. If only I had started earlier! I wasn’t aware of #7 either, I thought you had to contribute before you file taxes.
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Hank

You have up to April of the next year to contribute for last year.
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JoeTaxpayer

Hank, #10 – So long as the Roth IRA has a beneficiary listed, the beneficiary can take RMDs over their lifetime. The 5 year distribution is if there is No beneficiary listed and the IRA passes through a will.

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Hank

Thanks for the clarification, Joe. I appreciate the info. Good to know.
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Tom@BestCarCoverage

Nice list on reasons to own a Roth IRA. I actually converted some of my traditional IRA to a Roth with the intent of buying real estate. It is not an easy process but with rental income and capital gains tax free I hope to diversify retirement funds into real estate.
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