4 Big Benefits of a Roth IRA

Some investors shy away from Roth individual retirement arrangements (IRAs) because, unlike traditional IRAs, they do not provide the potential for an immediate tax deduction. Place money in a regular IRA, this line of thinking goes, and as long as you meet the income requirements, your money is safe from the tax collector for the year in which the contribution took place -- and every year thereafter until you withdraw it. You don't get a tax deduction with a Roth IRA, because contributions are made after the tax man has taken his cut.

But Roth IRAs offer several benefits that can put a smile on a savvy contributor's face. Depending on your situation in retirement, the benefits of a Roth IRA might be worth more to you than the benefits of a traditional IRA. It's worth taking a bit of time to decide between the two. To help you out, here are four of the major benefits a Roth IRA offers.

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1. You get tax-free income in retirement

The big bang for the Roth IRA buck is that while your contribution is taxed today, once you retire, withdrawals are tax-free. Traditional IRAs work the opposite way: You get a deduction today, but the money is taxed once you start to withdraw it.

You can save as much as $5,500 in a Roth IRA for 2018, plus $1,000 if you're 50 or older. Your dividends and any capital gains are also tax-free, as they are in a traditional IRA.

This can be great news for retirees who live on fixed incomes. The average income at retirement is $31,742, according to Census Bureau data analyzed by the AARP. Almost 30% of retired folks use their own savings, in addition to Social Security. Less of a tax bite might therefore be more welcome in retirement than at any other time of your life.

It's a good idea to project your estimated income at retirement and your anticipated tax bracket when determining whether a Roth IRA would benefit you more than a traditional one.

2. You can keep on contributing no matter how old you are

Traditional IRAs require that you stop making contributions when you hit age 70 1/2. But with a Roth IRA, you can contribute at any age, so long as you're earning income.

That could be beneficial if you plan to keep working after age 70 1/2. Working in retirement among this age group, whether full or part time, is a growing trend. Nearly a third of those in the 65- to 74 age group are expected to be working in 2022, according to AARP. Plus, the number of people 75 and older at work is projected to jump to 11% of that age group by 2022.

Given this trend, having this powerful savings vehicle in retirement could do wonders for your finances. If you want to work until 72 and continue to save for when you really want to slow down later on, with a Roth IRA, you can.

3. You don't have to take a required minimum distribution at a specific age

Traditional IRAs don't just require that you stop saving at 70 1/2; they also mandate that you start making withdrawals at that age, too. Required minimum distributions (RMDs) are determined by a formula set by the Internal Revenue Service (IRS): the balance in your traditional IRA account at the of the prior year divided by a factor in the IRS's Uniform Life Table.

With a Roth IRA, though, the timing and amount of distributions are entirely up to you. That flexibility may be especially helpful if your plans to either retire fully or work are fluid. About 26% of retirees, for example, decide to go back to work at some point after they officially retire, according to the University of Michigan Health and Retirement Study.

Given that the average life span in the U.S. is now 76 for men and 81 for women, there is plenty of opportunity to change your mind about how much money you want to withdraw from your Roth IRA and when.

4. You can leave your heirs money, and it's tax-free

The lack of RMDs for Roth IRAs also means that you can decide to preserve your IRA and pass it to your heirs undiminished if you choose. The RMD may whittle down a traditional IRA more than you'd like for estate planning purposes.

Any Roth IRA monies you leave your heirs will be tax-free. Roth IRA distributions are not only tax-free to you; they remain tax-free to anyone who inherits them. If you plan to leave an inheritance to your children or grandchildren, making it a Roth IRA is a way to ensure that they aren't hit with a large tax bill.

Note that anyone who inherits your Roth IRA, other than your spouse, will be subject to an RMD, although they are still likely to be tax-free.

If leaving money to your children or grandchildren appeals to you, or you want to make sure that any retirement money they inherit isn't significantly reduced by taxes, a Roth IRA could be the way to go.

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