When planning for retirement, the Roth Individual Retirement Account (IRA) stands out as a powerful and flexible investment vehicle.
Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, which means that while contributions are not tax-deductible, qualified distributions in retirement are tax-free.
This unique feature, along with the absence of required minimum distributions (RMDs), makes the Roth IRA one of the best choices for retirement savings.
Despite its popularity, most investors don’t fully utilize the potential of their Roth IRAs. These are seven underutilized features that can help maximize the benefits of your Roth IRA which should be part of your comprehensive financial planning.
#1: Immediate Access to Contributions
Did you know that with a Roth IRA, there’s no need to wait until you’re 59 ½ to access your funds?
Roth IRAs allow you to withdraw your contributions at any time, penalty-free. This means you can access the money you’ve contributed over the years while typically leaving any earnings within the account for continued growth.
This flexibility stems from the fact that Roth IRA contributions are made with after-tax dollars. For instance, if you contribute the Roth IRA limit of $6,500 per year for five years, you can withdraw $35,000 after that period without incurring any penalties or fees.
#2: Penalty-Free Early Withdrawals
Roth IRAs, despite being retirement accounts, allow penalty-free withdrawals of contributions and earnings before retirement under certain circumstances. The IRS tax code permits these withdrawals for specific uses, such as higher education expenses, first-time home purchases, and certain medical expenses.
Other exceptions include cases of disability, death, and corrections to excess contributions. This flexibility makes Roth IRAs more than just traditional retirement accounts.
#3: A Retirement Strategy for Non-Working Spouses
#4: Leveraging the Tax Saver’s Credit
Roth IRAs are mostly known for their after-tax contributions and tax-free growth. However, it’s possible to receive a credit for your contributions through the Tax Saver’s Credit. This credit allows you to enjoy upfront tax savings of up to 50% of your contribution, although qualification is income-dependent.
For example, if you’re married, filing jointly, and earn more than $47,500 (in 2025), you won’t qualify for the full 50% credit. However, you can still receive some upfront tax savings if you earn more than this amount.
#5. The Backdoor Roth IRA
There’s another “secret” strategy you should be aware of if your income is too high to contribute to a Roth IRA, which is the Backdoor Roth IRA.
A Roth IRA conversion is another name for a Backdoor Roth IRA. Here’s how a Backdoor Roth IRA works. Instead of directly funding a Roth IRA, money is first moved to a traditional IRA, also referred to as a non-deductible IRA. Once the money is there, you do a Roth IRA conversion to move the funds into a Roth IRA.
Sounds simple, right? But there’s a catch. On the amount that you convert, taxes are owed. That’s why, typically, the best years for Roth conversions are those when you have the lowest tax rates.
You may need to pay taxes on the converted amount, so it’s advisable to speak with your tax planner or a financial advisor before you proceed. A certified financial planner (CFP) or a registered investment advisor can guide you on complex strategies like these.
#6. Custodial Roth IRA
This strategy may come as a surprise to many. The IRS allows parents to open a custodial Roth IRA for their dependent children, even if they’re under 18.
The child must have actual earned income. If they do, this strategy can be used by parents, including small business owners, to help their children build long-term wealth.
The power of compound interest over time can significantly benefit your child. The key takeaway is that setting up a Roth IRA for minor children can provide a massive head start on tax-free retirement savings.
#7. Alternative Investments
This last feature is one that few know about.
Have you heard about Ted Weschler, the deputy to Warren Buffett at Berkshire Hathaway, who had $264.4 million in his Roth IRA at the end of 2018? Or about Randall Smith, a hedge fund manager, who had $252.6 million in his Roth?
There’s also Peter Thiel, the co-founder of PayPal who managed to invest in PayPal when it was just a startup, with shares priced at only $0.001 each. With a $2,000 investment, Thiel purchased 1.7 million shares of PayPal and held them in his Roth IRA account. Those PayPal shares would go onto become worth over $5 billion, and entirely tax-free.
Not all Roth custodians permit non-traditional investments. To do this, you’ll need to look for “self-directed custodians” for Roth IRAs who focus on holding alternative investments. Of course, alternative investments come with risks, so you’ll need to assess carefully. An experienced investment advisor can help navigate these options.
Final Thoughts
From tax-free withdrawals and flexible estate planning to backdoor contributions and wealth-building, the advantages that come with a Roth IRA can play a key part of your retirement strategy.
But be sure that your Roth IRA is optimized by reviewing your overall retirement strategy or work with fiduciary financial advisor who can help you can craft a plan that’s resilient and aligned with your long-term goals.
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