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An individual retirement account (IRA) is a smart investment in your future. Whether you’re planning for retirement or estate planning for your heirs, these special investment accounts are crucial to maximizing your cash value. IRAs provide tax benefits and provide a secure way to set money aside while gaining value. Not only that, but they will earn more money over time than a savings account and are considered to be safe investments.
Before opening an investment account, it’s important to understand the type of investment you’re making and the tax benefits it provides. This will allow you to make the best choice for both your present and future financial needs. There are two types of IRAs: A traditional IRA and a Roth IRA. The difference between them lies in the tax benefits that each offers.
In a traditional IRA, your initial investments are tax-deductible, but you will pay taxes on the money you withdraw in retirement. Roth IRAs are the inverse of this. You receive no tax benefits for investing the money, but you will not have to pay taxes on the IRA when you retire. In other words, you pay for a Roth IRA with after-tax dollars, but the money you invest and the dividends it earns are yours to withdraw tax-free as needed.
Is a Roth IRA Right for You?
Both a traditional and Roth IRA can be a smart investment vehicle. Depending on your individual situation and needs, you may benefit more from one than the other. Consider these 12 reasons to open a Roth IRA and decide for yourself whether these benefits make sense in your situation.
Keep reading to find out how to open a free Roth IRA account with Motif Investing, and get a free $100 bonus after you make your first trade.
1. You Can Earn Money Tax Free
One of the biggest advantages to a Roth IRA is the ability to draw more money from the IRA than you put into it without paying taxes on the investment earnings.
Essentially, any money your IRA investment earns is free; you can profit from the dividends without worrying about raising your tax bracket or losing a portion of the investment to taxes and penalties.
The purpose of an investment is to grow your wealth, and with a Roth IRA, you can ensure that any money you earn through smart investments will stay in your pocket rather than be eaten away by taxes. This is a big advantage over a traditional IRA, where the investment’s total value will be taxed upon withdrawal. There are few investment vehicles that provide this sort of profit-making opportunity.
2. You Can Minimize the Effect of a Higher Tax Bracket
Some individuals, due to their retirement plans and other investments, find themselves in a higher tax bracket upon retirement than they were while working. This can make a traditional IRA quite costly; the tax benefits of the initial investment are overshadowed by the higher tax rates on the IRA withdrawal.
A Roth IRA counteracts this problem. You can take advantage of a lower tax bracket during the time you make your contributions and avoid paying taxes at a later point, allowing you to minimize your overall tax burden.
To decide whether a Roth IRA is right for your situation, consider what tax bracket you expect to be in upon retirement. If your retirement plans include numerous investments or passive income sources, you may have a substantially higher income than you do today. In that scenario, a Roth IRA will be worth more to you than a traditional IRA.
3. You Can Withdraw Money Without Penalties
Traditional IRAs come with harsh penalties if the accounts are accessed at the wrong time. Since Roth IRAs are funded with after-tax dollars, you have greater flexibility in accessing them. The money you invest is yours to do with as you please, which means you can withdraw money from a Roth IRA before retirement without facing any penalties. This is an enormous benefit over a traditional IRA, which imposes limitations and fees on any money accessed outside of designated distribution times.
You can withdraw your own investments at any time. If you have an emergency and need access to the money in your Roth IRA, you can withdraw it freely even if you are not yet retirement age. Additionally, you can withdraw from the earned dividends of the investment and pay just 10 percent tax on that withdrawal. If you are over the age of 59 and a half, have held the Roth IRA for more than 5 years, or are disabled, you won’t need to pay any tax at all.
Having your contributions accessible in the event of an emergency makes it easy for some people to invest. It can be difficult to start planning for retirement when you do not already have a significant nest egg built up to help you through hard times. Knowing that the money is available for you to use in the event of disease, job loss or other calamity can make it easier to take the plunge and begin investing right away.
4. You Can Access Money to Buy a Home
One lesser-known benefit of a Roth IRA is the “first-time home buyer” exception, which allows you to withdraw money tax-free from your Roth IRA without facing penalties. Under this exception, as a first-time home buyer you can pull out up to $10,000 to use toward a down payment without penalties regardless of your age or other circumstances.
In order to take advantage of this, you will need to have paid into the Roth IRA for at least five years. The money you withdraw will need to be applied directly to the home purchase, such as a down payment or closing costs. If these criteria are met, you can withdraw up to $10,000, even if doing so would completely empty your Roth IRA.
Bear in mind that this first-time home buyer program is a one-time benefit, and the maximum value is $10,000. In other words, it’s in your best interests to utilize it at a time when you have at least $10,000 to draw from as you would not be able to withdraw smaller amounts that would add up to $10,000.
Of course, you can also withdraw your own contributions from the Roth IRA at any time, for any reason, without paying taxes or penalties. This means that you can use your contributions to a Roth IRA to help pay for a home as long as you don’t touch the dividends.
5. There is No Minimum Required Distribution
If you have a traditional IRA or 401(k), you will face a minimum required distribution (MRD). This is an amount you must withdraw from the account each year during retirement once you reach the age of 70 and a half. If you do not withdraw the MRD, you can face harsh penalties. With a traditional IRA, you could lose 50 percent of the MRD that you failed to withdraw!
Minimum required distributions can be a nuisance, especially if you do not require the money in an investment account in order to pay for your day-to-day needs each year. When you’re forced to withdraw money each year, you lose out on potential dividends that the investment could be earning. Additionally, your heirs will inherit these penalties when you die. Cashing out a traditional IRA to find it depleted from missed MRD payments can be a very unwelcome surprise.
Roth IRAs do not have MRDs, so you have the freedom to access your money when you need it rather than trying to schedule withdrawals or risk losing your investment. This allows you to accrue greater wealth, and it makes a Roth IRA an ideal estate planning vehicle.
6. You Can Pass Money Tax-Free to Your Heirs
When someone inherits a traditional IRA or other types of investment account, he or she would be required to pay tax on the money it contains. This can place a substantial tax burden on the individual and cut deeply into the value of an estate. Roth IRAs, which utilize after-tax contributions, are not subject to these taxes.
The combination of tax-free withdrawals and no minimum required distribution makes a Roth IRA ideal for estate planning. Since you will not be required to pull money from the Roth IRA each year, you can allow the investment to stay untouched throughout your retirement, leaving it for your estate.
Your heirs will be required to make MRDs from the Roth IRA once they have inherited it, but they will not pay income tax on this money. The Roth IRA would not increase the tax bracket of your heirs the way a traditional IRA would.
Additionally, your heirs will have the opportunity to liquidate your Roth IRA, withdrawing all of the funds held within it. They will not be stuck withdrawing money on annual basis the way they might with a different type of investment.
Because Roth IRAs can make such excellent vehicles for estate planning, many older retirees could benefit from converting their existing traditional IRAs into Roth IRAs. Speak with your financial adviser about the possibility a Roth IRA conversion for tax-beneficial estate planning.
7. You Can Protect Yourself from Future Tax Rate Increases
The primary reason that people would ever choose a traditional IRA over a Roth IRA is the tax incentive. When your IRA contributions are tax-deductible, you can lower your tax burden and hold on to more of your own money. However, this strategy is not always the right choice. In some situations, a Roth IRA can provide significantly higher long-term tax benefits to the investor.
When you invest in a traditional IRA, you avoid paying taxes on your contributions, saving you money today. However, you can put yourself at risk of a much higher tax burden at retirement if tax rates increase in the future.
Tax rates can vary from year to year, especially around election years when a new president is seeking to garner favor with one group or another. The taxes you pay today may not be the taxes you’ll pay tomorrow! Of course, there is no way of knowing what might happen in the next few decades, but there is always a chance that the tax rate could be much higher when you retire than it is now.
If you find yourself in a position of benefiting from an uncommonly low tax rate, it’s in your best interests to set aside money for a Roth IRA contribution while enjoying these low taxes; when the taxes rise in the future, your money will be safe.
Utilizing a Roth IRA allows you to budget for your investments and know that the money you withdraw later will not be eaten away by taxes, even if tax rates rise significantly.
8. You Can Open a Roth IRA At Any Age
Both Roth IRAs and traditional IRAs are designed with retirement planning in mind. However, a Roth IRA provides more flexibility. You can begin contributing at any point in your life; as long as you have some form of taxable income, you can begin setting that money aside into a Roth IRA.
Additionally, your contributions are not capped at any particular age. You cannot continue contributing to a traditional IRA once you’e reached the age of 70 and a half, but you can put money aside into a Roth IRA until the day you die if you wish.
Roth IRAs are best suited to individuals who are just beginning their retirement planning. When you’re young and beginning to establish your career, the odds are good that you are in a low tax bracket and can benefit from other tax breaks, softening the blow of contributing post-tax dollars to a Roth IRA.
By the time you’ve retired, the investment could have matured significantly, allowing you to make a substantial profit without paying taxes. This is especially valuable if you retire at a higher tax bracket, which is the case for many professionals.
If you’re young, you can begin putting money aside for a Roth IRA right away to begin your retirement planning. If you’re older, or even if you’re already retired, you can continue to set money aside in a Roth IRA for estate planning.
9. You Can Add Tax Diversity to Your Portfolio
When it comes to investing, it’s important to follow the age-old advice: Don’t keep all of your eggs in one basket. With annual contributions capped at $5,500, your Roth IRA may not be the only retirement investment you make, but it can be a powerful way to complement your other investments and provide you with a variety of options upon retirement.
Having a mixture of taxable and un-taxable assets in your retirement portfolio is a smart financial strategy. When your money is spread across multiple investments, you can make strategic decisions for withdrawing your funds while suffering the fewest tax penalties. For example, you may choose to withdraw money from a taxable account up to a specific limit, then withdraw the rest of the money you need from a Roth IRA in order to boost your income without raising your tax bracket.
10. You Can Combine a Roth IRA With Many Other Types of Investments
When it comes to retirement and estate planning, it never hurts to have multiple options. A diversified investment portfolio is important, and a Roth IRA is an excellent addition to your financial plan.
If you have a Roth IRA, it will not stop you from also having a traditional IRA, 401(k), or any other type of investment. You can also open multiple Roth IRA accounts, using each to invest in different ways. Your financial adviser can help you to identify the best strategies for maximizing the value of your investments.
Money kept in a traditional IRA can be converted to a Roth IRA, allowing you additional flexibility and options. This is especially helpful if you are unable to contribute fully to a Roth IRA due to your income but wish to enjoy the benefits of tax-free retirement account withdrawals.
11. You’ll Have Greater Control and Flexibility than With a Company Retirement Plan
There are definite benefits to taking advantage of a company’s 401(k) plan. If your employer matches contributions, you should certainly take the opportunity to build your retirement income. However, a 401(k) will not provide you with all of the options and flexibility of a Roth IRA. As we’ve said throughout this article, diversity and flexibility are important factors in retirement planning. That’s why you should put some money aside into a Roth IRA even if you have other retirement investments.
Roth IRAs are very flexible. A standard Roth IRA can be used to invest in stocks, bonds, mutual funds, certificates of deposit (CDs) and more. If you choose a self-directed IRA, your investment options become even wider.
When you establish your own Roth IRA, you will be able to choose the type of investments you wish to make. By contrast, employers will generally limit the investment options of their own retirement plans. Take advantage of your employer’s retirement planning tools, but don’t overlook the power of setting up a Roth IRA to complement your 401(k)!
12. You Can Choose a Self-Directed Roth IRA Option
By now, it should be obvious that a Roth IRA is an extremely flexible investment vehicle for retirement and estate planning. However, many people are unaware of a Roth IRA’s hidden strength: The ability to make self-directed investments in unexpected places.
If you open a self-directed Roth IRA, you can decide how the money within it is invested. This means that you can invest in things that would otherwise be off-limits for an investment account. One popular choice is real estate.
You can use a self-directed Roth IRA to purchase, hold and sell real estate. A Roth IRA is designed to be a long-term investment, and real estate is ideal in this scenario; the property you purchase can accrue in value over time, and rent payments made into your Roth IRA will be tax-free. Essentially, a self-directed Roth IRA allows you to earn tax-free income from real estate investments.
Earn $100 When You Open A Roth IRA With Motif Investing
There are many different online brokerage companies that allow you to open a Roth IRA. We suggest going with Motif Investing since you get a $100 bonus after depositing $1,000 and making your first trade. Not only that, but they have great service, are easy to use and give you investment suggestions depending on your income level. We’ve put together a few simple steps to help you setup your first account.
You can open a Roth IRA account at Motif Investing by clicking this link here. Type in your name, email and create a password to get started. Registration is completely free, and you only pay a commission each time you make a trade, as with all brokerage companies.
2. Select account type.
Enter in your email and create a password. From there, you’ll be prompted to distinguish which type of account you want. From the drop-down menu, be sure to select “IRA Account” and then click on “Roth” for the type.
3. Enter in your basic information.
As with all investment vehicles, you’ll need to enter in some basic information in order to get started. This usually includes your name, address, beneficiary information and annual income. Since you have the potential to make money with a Roth IRA, you will also need to enter in your social security information.
4. Choose your investment strategy.
Once you get an account setup with Motif, choose an investment strategy. They will help you determine what type of stocks and securities you should invest in based on your income and risk-tolerance level. This is very useful for those looking to get into the investment game without any knowledge of it. There’s also plenty of training centers with Motif to help you learn.
5. Deposit funds.
In order to get the $100 bonus, you must deposit a minimum of $1,000 and make at least one trade. Since each trade costs a commission of $9.95, you will spend at least $20 buying and selling it. In turn, you’re making an $80 profit just for getting a new account. We suggest using this money to invest and grow your Roth IRA. Depositing directly from a bank account doesn’t require any verification.
6. Earn $100.
As long as you make your first trade within the first 30 days of opening an ew account, you’ll receive your $100 bonus. We recommend doing this even if you don’t want to start investing – it’s free money!
Are You Eligible for a Roth IRA?
If the benefits described above appeal to you, it may be time to open a Roth IRA. However, you should know that not everyone can open this type of investment account as contributions are limited by income. If you earn over $116,000 as an individual or $183,000 when married and filing jointly, you cannot contribute fully to a Roth IRA. However, if you are a non-working spouse, you may still contribute to a Roth IRA as long as the household income is below $183,000 per year.
For people below the income cut-off amount, you are eligible to invest up to $5,500 per year into the Roth IRA. If you are over the age of 50, you can contribute an additional $1,000 annually. As noted previously, there is no maximum age for Roth IRA investments; you can continue to contribute throughout your retirement years if you wish.
If your income is above the limits of Roth IRA eligibility, you may still have options. The most valuable of these is to place after-tax dollars into a traditional IRA, then convert it into a Roth IRA. There are currently no limitations on Roth IRA conversions, so this strategy can allow you to enjoy the tax benefits of a Roth IRA even if you would otherwise be ineligible.
Retirement planning can be complex, and your financial future deserves care and attention. If you need help choosing between a Roth and traditional IRA, or if you are considering opening one of each, a financial planner can help. Speak with your financial adviser about your situation to create a retirement plan that works best for your needs.