Everything You Need to Know About Roth IRAs

The Roth IRA comes with perks traditional IRAs don't offer. The biggest benefit is how tax-friendly it is. You can't take a tax deduction on contributions, but the money grows tax-free and comes out tax-free if you follow the withdrawal rules.

"Having sources of tax-free income in retirement makes more of your retirement dollars available for lifestyle expenses," says Rob Burnette, CEO at Outlook Financial Center.

Another major benefit: You don't have to take required minimum distributions (RMDs). The IRS requires traditional IRA holders to start taking RMDs by April 1 of the year after they reach age 73. With a Roth, your money has more time to grow tax-free.

That extra time means compounding works harder. "If you retire at 62 with $100,000 in your Roth IRA, 10 years later it may be worth $250,000, and 20 years later nearly $675,000," says Brandon Reese, lead financial adviser at Harvest Wealth Group.

Contribution Limits

For 2024, the maximum is $7,000, or $8,000 for those 50 or older. You can contribute until the April 15 tax filing deadline in 2025.

For 2025, the limits are mostly the same: $7,000 up to age 50, $8,000 for 50-plus. However, people ages 60 to 63 can contribute up to $11,250 in 2025.

Kelly Gilbert, investment adviser at EFG Financial, recommends maxing out your Roth each year. "Mathematically, a Roth IRA will always be more beneficial than a pretax IRA if taxes remain the same or go up in the future. And most everyone agrees taxes are going up."

The catch: How much you can contribute may be reduced depending on your modified adjusted gross income (MAGI).

Married couples filing jointly can contribute the maximum in 2024 if their MAGI is less than $230,000. The cutoff if you're single is $146,000. Thresholds go up to $236,000 for couples and $150,000 for individuals in 2025.

Withdrawals

You can make tax-free and penalty-free withdrawals from your Roth IRA principal at any time. Withdrawals from earnings are qualified if you're older than 59½ and have held your Roth for at least five years.

Under 59½ and don't meet the five-year test? Withdrawals from earnings could face income taxes plus a 10 percent penalty.

Exceptions exist. You can take penalty-free (but not tax-free) withdrawals under certain conditions:

• Up to $10,000 lifetime for first-time home purchase

• Qualified education purposes

• Birth or adoption expenses

• Disability or terminal illness

• Unreimbursed medical expenses or health insurance premiums if unemployed

You'll still owe taxes on the earnings.

Benefits for Heirs

Tax-free withdrawals and no RMDs make it easier to leave money to heirs.

"Roth IRAs are a great wealth transfer vehicle," Reese says. "They enable you to transfer wealth tax-free."

If you leave your Roth to a granddaughter in a high tax bracket, she can benefit from tax-free withdrawals, provided you opened the account at least five years before your death.

"When the money is handed over, the inheritor can take it as their own, and any withdrawals are totally tax-free," Reese says.

Cash-Flow Options

Tax-free income from a Roth provides cash-flow options. You can start taking Social Security at 62, but your monthly payout will be significantly higher if you delay. The Social Security Administration boosts your monthly payout by up to 8 percent every year you hold off, up until age 70.

If you take tax-free withdrawals from your Roth, you can delay Social Security and take advantage of the annual boost.

No other investment "guarantees an 8 percent return like delaying Social Security does," Reese says. By taking income from your Roth instead of a traditional IRA or 401(k), you won't accidentally bump yourself into a higher tax bracket.

"The Roth IRA is a great way to bridge the income gap from the day you retire until the day you take Social Security."

Roth Conversions

If you hold a traditional IRA or 401k, converting to a Roth might make sense, particularly during a bear market. Money you withdraw from a traditional IRA to open a Roth gets taxed, but the tax hit is smaller when returns are down.

The best time to convert is when you have a dip in taxable income, says Kelly Wright, director of financial planning at Verdence Capital Advisors.

Low tax years can occur when you're well into retirement and your income is lower, or when a onetime event like a massive medical deduction or large business loss takes a bite out of your taxable income.

"You may be better off doing a Roth conversion now and paying little or no taxes on it," Wright says.

The Reality

The math works. The flexibility works. And unlike traditional IRAs where the government forces you to take money out at 73, Roth IRAs let your money grow as long as you want.

That's the whole point—control over when and how you access your retirement money, with no tax bill when you do.

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