Should you invest in a Roth IRA? A Roth IRA is an individual retirement account that allows you to contribute after-tax money to use for retirement. Because you are investing after-tax funds (think funds straight out of your checking account after payday) you won’t get any tax deductions on money you add to a Roth, but the benefits in retirement can be pretty substantial.

The taxation of withdrawals from a Roth in retirement are probably the biggest advantage to these types of accounts. As long your withdrawal comes after you are 59.5 years old (and you’ve had the account open at least 5 years), any of the gains you withdraw from the account will be tax free. That’s a huge advantage, especially if you have been contributing to the Roth for a long period of time.

This can be a nice benefit to your retirement plan compared to using a regular savings or brokerage account, where you are typically taxed every year on any growth you might have in that account.

For example, let’s say you are 25 years old and invest $5,000 into a Roth. Using a conservative 6% growth estimate, that $5,000 would grow to around $50,000 by the time you are 65. So the only portion of that money you have ever been taxed on is the $5,000 you originally contributed. You have over $45,000 of growth in the account and you can draw it out tax free in retirement. A pretty sweet deal.

How you can invest in a Roth IRA

Not everyone can just open a Roth and start dumping funds into it. Depending on your income, you may or may not be allowed to contribute (see those limits by clicking HERE). There are other ways to contribute, including through your company 401k (if a ROTH option is available).

If your income is too high to contribute, you could also look into doing non-deductible traditional IRA contributions and converting the fund over to a Roth account. This is a pretty complicated process you want to make sure you get right, so it’s important to work with a tax professional and financial advisor for help.

Converting your Traditional IRA to a Roth IRA

You can also convert your traditional IRA dollars into a Roth. The only downside is If your traditional IRA has pre-tax funds inside of it, you will be responsible for the taxes on any amount that your convert. This is another tricky situation you don’t want to mess up, so definitely talk to a tax professional before you put this strategy in place.

Other notes on the Roth IRA

No RMD’s. Unlike the traditional IRA, you don’t have to start taking income (RMD’s, or required minimum distributions) from a Roth after you reach age 70.5.

Keep contributions going. Unlike the traditional IRA, you can also add to the Roth after you reach age 70.5.

Rollovers. When you contribute to your company 401k and choose the Roth option, you can also roll those funds into

The Roth IRA or Roth 401k can be great options for investors looking for tax-free income in retirement. As with any investment plan, it’s a good idea to talk with a financial advisor and tax professional to determine if it’s a good fit for your retirement plan.