It’s easy to fall into the trap of believing the benefits of a Roth IRA are limited to retirement. After all, you’ve probably been told that you can contribute money on which you’ve already paid tax, grow your investments through the power of compounding, and withdraw your income 100% tax-free after you reach the age of 59 1/2. .
But there are exceptions embedded in the tax code that make the Roth IRA a treasure before and during retirement. If you want to get a glimpse of how this individual retirement account can give you more options over your lifetime, start maximizing your Roth IRA and enjoy access to benefits you’ve never had before.
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Withdraw contributions at any time
There are two components of a Roth IRA account: contributions and income. Most people have no idea that you can always withdraw your contributions. On the other hand, your earnings will be taxed if you touch them before you qualify.
This concept can be quite confusing for most, as there are all kinds of penalties and restrictions that come with other retirement accounts. But the Roth IRA comes with flexibility built in making it the perfect option for savers who don’t want to commit all of their money.
Say you contribute the maximum of $ 6,000 to a Roth IRA (2021 contribution limit) and your investments grow to $ 7,000. You are eligible to take the $ 6,000 whenever you want. It’s the growth of your account – the extra $ 1,000 you’ve earned – that rings the bell and potentially trigger taxes and fines if you don’t follow the rules.
In short, you can always withdraw what you contribute to your Roth IRA without paying taxes or penalties. You don’t have to wait until you are 59 1/2. You just need to remember that once you withdraw the money, you cannot use it as a replacement money. You are still subject to the annual contribution limits.
Fund your education
If you or a loved one is considering going to college, you may be able to delay student loans. A Roth IRA can be used to fund your study tab or that of a loved one. This is a perfect option if you already have a healthy portfolio of investments in a workplace retirement plan and can save some extra money for qualified educational expenses.
Withdrawing money early from a retirement account usually ends up with a large tax penalty. But you can dodge the 10% fine if you use your Roth IRA funds to pay for qualified education costs such as tuition, books, fees, and supplies.
To take advantage of this Roth IRA education option, start stocking as much as you can on the account each month until you hit the contribution limit. You can even open a Roth IRA for your child if they have earned an income by having a job. It’s a great way to have a backup source of funding that can be used to pay for education or start your child’s journey to wealth building.
Buy a house
One of the best kept Roth IRA secrets is the homeowner’s exemption. It’s helpful if you’re trying to buy a home and don’t have enough savings to take the next step.
Roth IRA holders are eligible to use up to $ 10,000 in revenue (lifetime limit) to build, rebuild, or buy a home without a penalty or paying tax on that income. Make sure to adhere to the five-year rule and pass the qualified distribution test. This allows you to bypass the taxes you would have to pay if you tried to claim this homeowner’s exemption through a traditional IRA. But here’s the catch: you must qualify as a first-time home buyer. Fortunately, being a first-time home buyer really means that you haven’t owned a home in the past two years.
This homeowner’s exemption gets even sweeter when you add up the benefits of your contributions. The $ 10,000 homeowners exemption is in addition to any contributions you have made. So, if you’ve contributed $ 40,000 to your Roth IRA account in the past 10 years, you can withdraw the full $ 40,000 plus the $ 10,000 homebuyer exemption amount.
Benefits are better than ever
More people are eligible to contribute to a Roth IRA as income ranges have increased. If you are eligible to contribute, take advantage. This is an offer that may not last forever.
While you may have initially fallen in love with the Roth IRA because of the unlimited amount of tax-free income you can enjoy in retirement, that’s just the beginning of the benefits. It is one of the most popular accounts in the world as it can serve as a flexible savings option to meet your current needs, while helping you build a wealth portfolio that will finance your future lifestyle.