A Roth IRA is an advantageous option for taxpayers who are able to enjoy earning tax-free interest on their retirement account. While a Roth IRA--unlike a traditional IRA--is contributed to with after-tax funds, converting to a Roth IRA is a way to enjoy tax-free money during your retirement years.
Avoiding Future Tax Rates
Tax rates are unpredictable, and there is always a chance that rates could be higher when it comes time for you to withdraw funds from your retirement account. Through a Roth IRA, a person can ensure she will not have to pay taxes when it is time to draw retirement benefits. While converting to a Roth IRA will require you to pay a tax penalty on the tax-free funds you had previously contributed to a traditional IRA, you can be assured you will not have to pay future, potentially higher, tax rates.
No Mandatory Distributions
A Roth IRA does not have any mandatory distributions associated with drawing retirement. In fact, the chief requirements are that a person is older than age 59 1/2 and has contributed to the IRA for more than 5 years. If a person meets these requirements, he is able to withdraw funds at any time in any amount entirely tax free. This also allows a person to leave a more significant portion of her estate to her beneficiaries.
While 59 1/2 is also the age one can begin making withdrawals from a traditional IRA, there are mandatory withdrawal amounts after age 70 1/2.
Tax-Free Benefits to Beneficiaries
Many Americans choose to leave their Roth IRA to a beneficiary of choice, such as a relative, loved one or even a charity near to their heart. Because the Roth IRA owner has already paid taxes on the funds contributed, the beneficiaries are able to inherit the funds completely free of tax payments. Providing an inheritance without tax burden is a major benefit for the recipients of the IRA account.
Some Non-Taxed Early Distributions
Dependent upon the reason for distribution, it is possible to withdraw (tax-free) earlier than age 59 1/2 from a Roth IRA. These non-taxed early distributions include taking $10,000 to purchase your first home, using the funds for higher education and requiring funds if you become disabled or otherwise need a hardship distribution for medical expenses. The five-year contribution rule does apply to early distributions, however.
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