5 Reasons to Love the Roth IRA

This retirement savings account offers perks traditional accounts don’t.

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One of my favorite tools that you can use to save for retirement is the Roth IRA. Allow me to express my enthusiasm for this excellent retirement savings tool. Here are five reasons to love the Roth IRA:

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It allows you to pay less taxes. The Taxpayer Relief Act of 1997 created the Roth IRA. This unique savings vehicle allows us to place after-tax dollars into a retirement savings account, and never have to pay taxes again on those funds. Also, and most importantly, we never pay taxes on the earnings from those funds. If you used any other traditional account to save for retirement, including Social Security, you may have to pay taxes on withdrawals. The Roth IRA is one of the only ways to avoid those taxes.

It provides tax diversification. Chances are you already have a traditional IRA or a 401(k) through your work place. Contributions to those accounts are made pre-tax, so you don’t pay income tax on that money now, but distributions are taxed. The Roth IRA works just the opposite. Contributions to it are after-tax and you don't have to pay taxes on those funds once you reach retirement. Also, any earnings you receive from those funds won't be taxed. By having both a 401(k) and a Roth IRA you hedge your bets against the tax rates of the future.

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You can withdraw money without penalty. You can withdraw all of your Roth IRA original contributions and earnings at age 59 1/2 without having to pay any taxes or penalties. And under certain circumstances you can withdraw your funds even earlier. While I hesitate to recommend distributions before retirement, you are allowed to withdraw money from your Roth IRA before age 59 1/2. The key thing to remember is that you can only withdraw your original contribution without penalty. If you withdraw the earnings from those contributions, then you will generally face taxes and penalties. But there are also a few ways around that.

A first home purchase or extra college savings. You can withdraw funds from your Roth IRA (both contributions and earnings) without penalty to buy your first home or for college education expenses. I don't recommend that you do this since the intent of the account is retirement savings, but it's nice to know that you could if you need to.

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Easy to open and control. A Roth IRA can be opened in as little as 30 minutes. Typically you can invest in a wide variety of investments including stocks, bonds, cash, and even real estate in some cases. Roth IRAs generally have more investment options than the typical company 401(k). Work with a discount online broker or your local back to determine your options. Each place is going to be different in terms of the fees and amount of flexibility you have with the accounts, so be sure to choose wisely. You can always move your money to another Roth IRA or open a second one if you choose.

Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.