There's more to a Roth IRA than just the tax benefits.
While your contributions won't get you a tax deduction, Roth IRAs provide the unique benefit of tax-free retirement income down the road. This is certainly the most well-known reason to open a Roth IRA, but it isn't the only one. Here's a discussion of the tax advantage, plus four other reasons why a Roth IRA could be the right retirement account for you.
You want to lock in your current tax rate
While there are several differences between traditional and Roth IRAs, the tax treatment is the most significant. With a traditional IRA, you may qualify for a tax deduction on your current year return for your contributions, but your eventual withdrawals will be considered taxable income. On the other hand, with a Roth IRA you don't get a tax deduction for your contributions, but qualified withdrawals are 100% tax free.
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For this reason, a Roth IRA could be a smart choice if you're in one of the lower (10% or 12%) tax brackets now. By contributing to a Roth IRA, you're going to pay your current tax rate. Regardless of what tax bracket you're in when you retire, you won't pay a dime in taxes when you tap into your retirement nest egg.
Your money won't be all tied up with a Roth IRA
When I suggest to people that they need to increase their retirement contribution rates, most of the resistance I hear is to the effect of, "That sounds great, but I'm not sure I want my money tied up for decades -- what if I need it in the meantime?"
Opening a Roth IRA with your favorite online brokerage could be a good compromise if this is a concern of yours. Because you've already paid tax on the money you've contributed to a Roth IRA, the age restrictions that apply to most retirement withdrawals don't apply to it. In other words, you are free to withdraw your Roth IRA contributions (but not any investment profits) at any time, and for any reason, without having to pay a penalty to the IRS.
No required distributions when you're older
Opening a Roth IRA can be a smart choice if you aren't sure you'll need your retirement savings, or if you don't plan to retire until you're in your 70s or older.
Most other retirement accounts require the owner to start taking withdrawals after they reach the age of 70-1/2, regardless of whether or not they need or want the money. Roth IRAs are an exception. There are no required minimum distributions (RMDs), no matter how old you get.
You're over 70 and still working
Similarly, there's no maximum age to contribute to a Roth IRA, making it a great choice for older workers who want to invest money in a tax-advantaged manner. With a traditional IRA, you cannot contribute any new money if you're over 70-1/2 years old. With a Roth IRA, the only requirement is that you've earned income, either from a job or from a business you actively participate in.
You make too much to take a traditional IRA deduction
Even if you have a retirement plan at work, such as a 401(k), an IRA can be a great way to save more for retirement while having more control over your investments. For example, you can contribute enough to your 401(k) to take advantage of your employer's matching contributions, and then invest in an IRA where you can choose some individual stocks for your retirement funds.
The problem is that if you have access to a retirement plan at work, the ability to take the traditional IRA deduction goes away if you earn more than a certain amount. Roth IRA contributions are also income-restricted, but as you can see in this chart, the thresholds are far more generous.
Data source: IRS. Traditional IRA deduction thresholds are if you can participate in an employer's retirement plan.
For example, if you're single and have a 401(k) at work, you can't take the traditional IRA deduction for 2018 if your AGI exceeds $63,000. However, if you earn more than this, but less than $120,000, you can still make a full contribution to a Roth IRA.
Several key benefits
As you can see, there are more reasons you might want to invest with a Roth IRA than just the tax benefits. Whether you're young and want to take advantage of your low tax bracket, you're older and can't contribute to a traditional IRA, or you're somewhere in between, a Roth IRA could have some appealing benefits.
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