It is easy to fall into the trap of believing that the benefits of a Roth IRA are limited to retirement. After all, you have probably been told that you can contribute money you have already paid taxes on, increase your investments through composition power, and withdraw your earnings 100% tax-free after reaching the age of 59 and a half.
But there are exceptions built into the tax code that make the Roth IRA a treasure before and during retirement. If you want to catch a glimpse of how this individual retirement account can provide you with more options throughout your life, start maximizing your Roth IRA and enjoy access to benefits you’ve never had before.
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Withdraw contributions whenever you want
There are two components to a Roth IRA account: contributions and earnings. Most people have no idea that you can always withdraw your contributions. On the other hand, your winnings will be taxed if you touch them before you qualify.
This concept can be quite confusing for most, because there are all kinds of penalties and restrictions that come with other retirement accounts. But the Roth IRA comes with built-in flexibility that makes it the perfect option for savers who don’t want all their money tied up.
Let’s say you contribute a maximum of $ 6,000 to a Roth IRA (2021 contribution limit) and your investments increase to $ 7,000. You are eligible to receive the $ 6,000 whenever you want. It is your account growth – the additional $ 1,000 you earned – that would sound the alarm and potentially trigger taxes and penalties if you don’t follow the rules.
In short: you can always withdraw what you contribute to your Roth IRA without paying taxes or fines. There is no need to wait until you are 59 1/2. You just need to remember that, after withdrawing the money, you cannot put it back as replacement funds. You are still subject to annual contribution limits.
Fund your education
If you or a loved one is thinking about going to college, you can postpone student loans. A Roth IRA can be used to fund your account or that of a loved one in college. This is a perfect option if you already have a healthy portfolio of investments in a professional retirement plan and can save some extra money for qualified educational expenses.
Typically, withdrawing money from an early retirement account can result in a large tax penalty. But you can avoid the 10% penalty if you use Roth IRA funds to pay for qualified education expenses, such as tuition, books, fees and supplies.
If you want to take advantage of this Roth IRA education option, start saving as much as you can each month in your account until you reach the contribution limit. You can even open a Roth IRA for your child if he has earned income from work. It’s a great way to have a backup funding source that can be used to pay for education or start your child’s wealth-building journey.
Buy a house
One of the best kept Roth IRA secrets is the owner’s exemption. It is useful when you are trying to buy a house and do not have enough savings to take the next step.
Roth IRA holders are eligible to use up to $ 10,000 in earnings (lifetime limit) to build, rebuild or buy a home without a penalty or payment of taxes on those earnings. Make sure you follow the five-year rule and pass the qualified distribution test. This allows you to ignore the taxes you would have to pay if you tried to claim the exemption from that owner through a traditional IRA. But here’s the catch: you need to qualify as a home buyer first. Fortunately, the first time home buyer really means that you haven’t had a home in the past two years.
That owner’s exemption becomes even sweeter when you add the benefits of your contributions. The $ 10,000 exemption for homeowners is in addition to all the contributions you have made. Therefore, if you have contributed $ 40,000 to your Roth IRA account in the past 10 years, you can withdraw all $ 40,000 plus the buyer’s exemption amount of $ 10,000.
The benefits are better than ever
More people are eligible to contribute to a Roth IRA because income ranges have increased. If you qualify 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 that you can enjoy during retirement, this is just the beginning of the benefits. It is one of the most important accounts on the planet because it can act as a flexible savings option to meet your current needs, while helping you build a wealth portfolio that finances your future lifestyle.