3 Reasons to Open a Roth IRA in 2022 | Smart Change: Personal Finances


(Kailey Hagen)

While no retirement account is right for everyone, the Roth IRA comes pretty close. It offers benefits you won’t find with most other retirement accounts, and these could help you save a lot more. Here’s a look at three reasons why you might consider opening one this year.

1. Flexibility

Roth IRA are among the most flexible retirement accounts. You can open one and contribute to it as long as your income is not too high (more details below). You might even be able to contribute to a Roth IRA if you’re not working, as long as you’re married to someone who earns at least as much as you contribute to the IRA.

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A Roth IRA also gives you the freedom to decide how you want to invest your money. While most 401(k)s only gives you a few mutual funds to choose from, you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more with a Roth IRA. And you’re free to change your investment strategy as often as you like.

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2. Tax Free Withdrawals

Unlike the traditional IRA, Roth IRA does not give you tax relief up front. But because you pay taxes on your contributions, you get tax-free withdrawals later. This means that the government will essentially ignore any money you take out of this account when deciding how much you will owe in taxes in retirement.

Roth IRAs also allow you to withdraw your contributions without penalty at any age. Most other retirement accounts carry an early withdrawal penalty if you withdraw money before 59 1/2 for no good reason. You could still face penalties if you try to withdraw your Roth IRA earnings before 59 1/2, however.

It’s also worth noting that just because you can withdraw your money from a Roth IRA at any time doesn’t mean you should. This will reduce your retirement savings, so it’s best to leave your money alone until retirement whenever possible.

3. No minimum distribution required

The Roth IRA is the only retirement account that does not have Required Minimum Distributions (RMD). These are mandatory annual deductions at age 72 that everyone must deduct from their retirement account. This is how the government makes sure to get a share of your savings. But the laws governing Roth IRAs leave them exempt from RMD requirements.

The absence of RMDs means you can let your money in your Roth IRA grow for as long as you want before withdrawing it. Or if you don’t need the money, you can pass it on as a tax-free gift to your heirs.

Who is a Roth IRA not good for?

Despite these benefits, a Roth IRA isn’t the best option for everyone. It might not even be an option for you if you have a higher income. If your income exceeds a certain amount for your tax filing status, you cannot contribute directly to a Roth IRA. However, you can still have a Roth IRA backdoor. This is where you put money into a traditional IRA and make a Roth IRA Conversion in the same year.

A Roth IRA also might not be the best choice for those who believe they are in a higher tax bracket now than they will be in retirement. By storing your money in a traditional IRA, you can defer taxes until you are in a lower tax bracket, when you will lose a smaller percentage of your income to the government. But if you do that, you will have to pay taxes on your contributions and earnings.

Even if you think a Roth IRA might be right for you, it might not be enough as your only retirement account. You can only contribute up to $6,000 to a Roth IRA in 2022 or $7,000 if you’re 50 or older. If that’s not enough for you, you may need to link a Roth IRA to another type of retirement account, such as a 401(k). Start with your Roth IRA, then, once you’ve maxed it out, switch to the other account for the rest of the year.

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