3 Little-Known Perks of Roth IRAs

There's more to your Roth IRA than tax-free growth.

Roth IRAs are famous for offering tax-free savings to American workers. But did you know that your Roth offers preferential treatment on some contributions and withdrawals too? Read on to learn how to take advantage of these three lesser-known perks of your Roth IRA.

1. Penalty-free withdrawals

Most retirement accounts lock your money away for years or even decades. Roth IRAs are a little different in that regard. Odds are you can pull some of the cash out of your Roth IRA should you need it.

The vast majority of qualified retirement accounts, including IRAs and 401(k)s, make it hard to take withdrawals outside of retirement. The contributions you make to a retirement account are, by design, easiest to take out during retirement. But if you need liquidity in an emergency, you could be hit by a 10% penalty on top of ordinary income tax when you empty your account. And while 401(k) loans are popular, they charge interest just to access your own money.

Roth IRAs, on the other hand, are a little different. Contributions to a Roth IRA are always eligible to be withdrawn penalty free. And because you've already paid tax on the contributions, your withdrawal won't be taxable. Liquidating your Roth IRA should be a last resort when in need. However, with penalty and tax-free return of contributions, your Roth IRA could be a much needed lifeline.

Read on: The best Roth IRA accounts of December 2024

2. No RMDs

Required minimum distributions can take retirees by surprise. On qualified retirement accounts, you must eventually take distributions and pay taxes. However, the tax-free nature of Roth IRAs exempts them from forced distribution.

When owners of qualified retirement accounts reach age 72, they must begin taking required minimum distributions, or RMDs. Essentially, retirees must begin taking distributions from their qualified accounts according to a schedule set by the IRS. Because these accounts have grown in a tax-deferred manner, the proceeds are fully or partially taxable as ordinary income.

Due to their tax-free nature, Roth IRAs are not governed by the same rules as other qualified accounts. Because tax has been prepaid, the IRS does not need to forcibly collect it on the earnings of the account. Put simply, your Roth IRA can be withdrawn on your own terms, not the terms of the IRS.

3. Roth conversions

Does tax-free growth sound good to you? If so, you may want to consider a Roth conversion. Roth conversions allow you to prepay tax today for tax-free growth tomorrow. Think of it as a mega contribution -- well above the standard contribution limit of $6,000.

Converting an IRA to Roth is one way to quickly put money into a tax-free vehicle. Roth conversions involve recharacterizing part or all of your IRA by paying taxes on that amount today. And with tax-free growth in the future, this move could save you thousands in taxes down the road. Roth conversions can be tricky! Consult with your tax advisor to see if a Roth conversion is right for you.

Few vehicles offer the tax advantages of a Roth IRA, and none offer the same flexibility while saving for retirement. Savers in need of liquidity can take full advantage of penalty and tax-free withdrawal of contributions. Retirees can withdraw their savings on their own time without RMDs. Plus, Roth conversions could give your tax-free savings a lift. With these three lesser-known tricks, you can make the most of your Roth IRA.