Reasons To Contribute To A Roth IRA

We’re about a month away from a certain day in April (now April 18) that’s known to most people only as the dreaded tax day. But it's also the deadline to make contributions to an IRA (and an HSA if you're eligible) for 2016. Contributing to a Roth IRA can be particularly beneficial. (If your income is too high to contribute to a Roth IRA, check out this back-door method to get around the income limits.) Here are 12 reasons why:

1) You don't have to make changes to your tax return. Unlike an HSA and possibly a traditional IRA, Roth contributions aren't tax-deductible so they won't alter your tax return if you've already filed it for 2016.

2) You still have access to your contributions. Another difference between Roth IRAs and HSAs and traditional IRAs is that with a Roth IRA, you can withdraw the sum of your contributions at any time and for any purpose without tax or penalty. That means if you have some money sitting in a savings account for emergencies, you might as well put it in a Roth IRA since you can still access the contributions if you need

You would just need to fill out a withdrawal form, which can actually discourage you from spending the money frivolously. Be aware that if you withdraw any earnings, they may be subject to taxes plus a 10% penalty if you're under age 59? or haven't had the account open for at least 5 years, but all the contributions come out first. If your Roth IRA is in cash, there probably won't be much in earnings anyway given today's low interest rates.

3) You have a lot of investment flexibility. Unlike your employer's retirement plan, you're not limited to a fixed number of investment options. You can generally open a Roth IRA at your favorite financial institution and invest it in everything from an FDIC-insured savings account to individual stocks. In a self-directed Roth IRA, you can even invest in gold bullion, direct real estate, and a small business.

4) You can use the earnings tax-free for a down payment on a home. In addition to withdrawing the contributions tax and penalty-free, you can also withdraw up to $10k of earnings penalty-free towards a home purchase as long as you haven't owned a principal residence in the last 2 years. If you've had the Roth IRA for 5 years, those earnings would also be tax-free.

5) You can use it for education expenses. Earnings can also be used penalty-free for qualified education expenses for you, your spouse, your dependent children, or your grandchildren. Since it's considered a retirement asset, the account balance is generally not counted against you in calculating eligibility for financial aid. However, withdrawals from a Roth IRA do count as income for purposes of financial aid so be careful in which years you take the distributions.

6) Your money can grow to be tax-free for retirement. Speaking of retirement, the main benefit of a Roth IRA is that any earnings you don't withdraw will eventually be tax-free as long as you've had the account for at least 5 years and are over age 59 1/2. This can help you avoid higher tax brackets.

For example, taxable income up to $75,900 for a married couple filing a joint return is currently taxed at 15% or less. Any income over that amount will be taxed at 25% or more. If a retired couple has $80k of taxable income, they could reduce it to the $75,900 limit by dipping into their tax-free Roth IRA(s) for the remaining $4,100 and avoid moving into the 25% marginal tax bracket. This would be even more beneficial if tax rates go up in the future.

7) You start the 5 year period now. Did you notice all the references to the account having been open for at least 5 years? Well, even if you can only afford to contribute a minimal amount, just opening the account starts the clock ticking towards the end of those 5 years.

8) It can make you eligible for more health insurance subsidies in retirement. That's because the subsidies in the Affordable Care Act (assuming it’s still in place) are based on your modified adjusted gross income, which does not include tax-free Roth IRA distributions. This could make a big difference in the price of your premiums if you ever purchase insurance through the law.

Let's say the same retired couple above retires this year at age 62. Since they're not eligible for Medicare until age 65 and they may not have retiree health insurance through their employers, they may need to purchase health insurance through the exchanges. According to this calculator, if they have $80k in modified adjusted gross income they wouldn't qualify for any subsidies and their health insurance premiums for a mid-level "Silver" plan may be $19,459 per year. However, if half of that income came from tax-free Roth IRAs, they could qualify for subsidies bringing the cost of their health insurance down to only $3,275 a year.

9) It has protections from creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, an inflation-adjusted $1 million in total IRA assets are protected from bankruptcy. Most states also extend protection for Roth IRAs from creditors outside bankruptcy as well.

10) You don't have to take required minimum distributions (RMDs). With other retirement accounts—including Roth 401(k)s—you have to start taking a minimum amount each year after you turn 70? (except your employer’s retirement plan if you’re still working). With a Roth IRA, you can leave the money in there to continue growing tax-free as long as you like.

11) There are estate planning benefits. When you pass away, your Roth IRA can pass directly to your beneficiaries without going through the time and expense of probate. Your heirs can then continue to benefit from tax-free growth by stretching the distributions over their lifetime.

12) It'll make you feel better about yourself. Admit it. Doesn't the sound of having a Roth IRA just make you feel more financially responsible?

The earlier you contribute, the longer your money can grow to be potentially-tax free and the longer you’ll enjoy these other benefits as well. So if you haven't contributed to a Roth IRA for 2016, you have about a month left. What are you waiting for?