Here’s What Happens When You Score a Profit in a Roth IRA

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You don’t have to worry about taxes on gains when you save in a Roth IRA. Read on to see if a Roth IRA makes sense for you. 

A good 36% of Americans have an individual retirement account (IRA) for retirement savings purposes. But you don’t necessarily need to contribute to a traditional IRA when building your nest egg. You may decide you want to open a Roth IRA instead for the different benefits involved.

With a Roth IRA, you don’t have to pay taxes on the withdrawals you take from your savings plan during retirement. Roth IRAs also do not impose required minimum distributions, so you’re not forced to withdraw funds from your savings yearly once you reach a certain age. That means you can keep your money invested in a tax-advantaged manner for longer, and also, if you so choose, leave a nice portion of your savings behind to your loved ones.

You may be wondering what happens when the investments in your Roth IRA make money. After all, that’s your goal. The good news is that investment gains in a Roth IRA won’t result in a tax obligation for you — not in the near term or the long term.

You can take your profits without owing the IRS a dime

Capital gains in a brokerage account are subject to taxes the year those gains are realized (meaning, the year you sell and book your profit). And gains in a traditional IRA are tax-deferred, which means you don’t pay taxes on profits year after year, but rather, when you make withdrawals.

With a Roth IRA, investment gains in your account are never subject to taxes. And that’s just one reason why you may want to consider saving for retirement in one of these accounts.

Is a Roth IRA right for you?

Tax-free gains are a nice thing to have. But remember, there are other perks you get to enjoy with a Roth IRA, like tax-free withdrawals and the ability to leave your money alone as long as you want to.

That said, the one drawback of funding a Roth IRA is that you won’t get a tax break on your contributions. And losing out on that tax break could make it difficult to save for retirement in the first place. Let’s say you want to contribute $3,000 to a tax-advantaged retirement plan. You may not be able to swing that contribution without reaping some immediate savings.

With a traditional IRA, that contribution will make it so the IRS can’t tax you on $3,000 of earnings. Your actual savings there will depend on the tax rate that applies to you. But with a Roth IRA, your $3,000 contribution won’t give you any tax benefit the year you put that money in. You may find that aspect of funding a Roth IRA difficult.

You should also know that you may be barred from funding a Roth IRA if your income is too high. The thresholds change annually, but right now, Roth IRA contributions are off the table if you earn more than $153,000 as a single tax-filer or $228,000 as a married couple filing taxes jointly. However, if you don’t qualify to fund a Roth IRA directly based on income, you could always put money into a traditional IRA and then convert it to a Roth after the fact (known as a Backdoor Roth IRA).

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