Why Roth IRAs are a Cheat Code!

Getting a Roth IRA is awesome and hey it sounds fantastic. Roth IRAs are mainly talked about as a retirement vehicle and are a really great tool for building your retirement. But there are many other benefits to having a Roth IRA besides just the mainstream ones and I dig into those within this article.

Qualifications of a Roth IRA

Not all qualify for a Roth IRA. Most who read this article probably will qualify but it is good to list the qualifications.

• You make less than $228,000 if you are married filing jointly
• You make less than $153,000 if you are single
• You have to have taxable compensation (be making legit income)

These numbers change all the time. Go to https://www.irs.gov/publications/p590a to ensure you have the latest information.

Bad news first

If you draw out your earnings (growth) of your IRA earlier than 59 1/2 or a qualified exception as noted below you can get a 10% penalty tax. The government is incentivizing people to mainly use it for retirement. Make sure before taking out any money you understand if it is going to be penalized or not. Be sure to talk to a tax professional beforehand if you are unclear.

Benefits most know

Grows Tax-Free Most of us know that any money you put into Roth IRA can grow tax-free. This means that any money you put in is already taxed and therefore won’t be taxed when you take it out. This also means any growth you get is not taxed as long as you take it out when you are qualified to take it out.

Retirement Fund most people will use this for their retirement. This is a perfect fund for that. Because there are rules for taking money out of this account it helps us behaviorally leave this money alone and let it grow.

Benefits not well known

Backup Emergency Fund You can actually use this as a backup emergency fund. Most people are taught that if you take any money out of your Roth IRA you will get a 10% penalty. This is true on any money above what you contributed. (ie the growth) but you can take out up to what you have contributed without penalty. For example: Let’s say that you’ve contributed (put in) $18,000 into your Roth IRA but it is worth about $24,000 because of the awesome investments you’ve made. This means you can take out up to $18,000 penalty-free. The $6,000 dollars of growth cannot be taken out without penalty until you retire unless you qualify for an exception. This brings us to our next point…

Taking out money for emergencies should be done as a last resort. Having an emergency fund in a nonretirement account is the best. Part of the reason for this is that you typically want your emergency fund in a savings account that is FDIC insured (meaning the government backs the money) in case the bank goes bankrupt. Whereas, if you invest in stocks and the market is down you could withdraw money at a loss, or if it is in a money market account those are not FDIC insured.

House Fund You can take up to $10,000 of growth out of your Roth IRA if you are using the money for a first-time home purchase or repair. If we use the numbers from the previous example you could actually use all $24,000 of the money in your Roth IRA because there is only $6,000 of growth.

Medical Expenses You can use your Roth IRA to pay unpaid Medical Expenses which is awesome knowing that can use this as a backup even above your contribution rate. You can also use it for medical premiums.

Qualified Education Expenses You can use your Roth IRA to pay for some qualified education expenses. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified for higher education expenses. ( https://www.irs.gov/publications/p590b)

Disability If you end up becoming permanently disabled you can access your IRA growth. Your beneficiaries can also withdraw as a result of your death.

Flexibility There is more benefits to a Roth IRA than what is listed here. The biggest benefit I believe is its flexibility. Flexibility in the funds you choose to invest in because you aren’t limited like you are in other retirement vehicles. Flexibility in accessing your money. We sometimes don’t know what life is going to throw at us. What circumstances or opportunities will come our way? A Roth IRA is a great way to help build retirement income but has the flexibility to access it today in certain situations.

Conclusion

Having a Roth IRA is one of the best vehicles to help grow your wealth and something that is different for those who aren’t necessarily in the top 1%. Everyone should take advantage of a Roth IRA that can. Most financial institutions make this easy. Some popular ones are Vanguard and M1finance, but it doesn’t really matter who you do it with as long as it is with someone who is SIPC-insured.

Sources

• https://irs.gov

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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professional before making any significant decisions

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Updated on 11/1/23