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What is the benefit of Roth IRA in comparison to putting the money in a taxable account (stocks or MFs)?

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    Roth IRAs are also invested in stocks and bonds, and brokerages offer Roth IRA accounts in which you can invest ins stocks and bonds if you choose. In your mind, what exactly are the differences between Roth IRAs and brokerages? Jan 10 at 20:25
  • @Dilip Sarwate I know that Roth IRA is invested in MFs and stocks, but I do not see an in Roth IRA when I compare it to a regular brokerage account. I have seen comparisons between traditional and Roth IRAs, here I am wondering what are the pluses and minuses when Roth is compared to a brokerage account if both are fully invested in a S&P500 index fund (e.g., VOO).
    – per
    Jan 10 at 22:09
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    Roths lets you withdraw funds without any tax penalties as long as they are not gains. Traditional IRAs dont!
    – JonH
    Jan 10 at 23:18
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    Not much of a benefit? Hardly. Of course they are after tax that money you put in was after tax what would ya think???
    – JonH
    Jan 11 at 3:44
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    @JonH The question is about comparison of Roth with direct brokerage investment, not comparison between Roth and traditional IRA. Both Roth and direct brokerage investments are after tax.
    – per
    Jan 11 at 16:41
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With a "standard" investment account, you have to pay taxes on dividends when you receive them, and on capital gains when you sell for a gain.

With a Roth, growth and dividends are not taxed. You put in "after-tax" dollars and can withdraw both your contributions and gains (including dividends) with no tax consequence.

The downside is that you cannot start withdrawing the gains until you're 59 1/2 and have had a Roth for at least 5 years (with some limited exceptions), lest you incur a 10% penalty AND pay the tax on the growth. They are designed for retirement and should be considered virtually untouchable until you reach retirement age.

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from a comment you wrote:

I know that Roth IRA is invested in MFs and stocks, but I do not see an in Roth IRA when I compare it to a regular brokerage account. I have seen comparisons between traditional and Roth IRAs, here I am wondering what are the pluses and minuses when Roth is compared to a brokerage account if both are fully invested in a S&P500 index fund (e.g., VOO).

Imagine a college aged kid who has a few thousand dollars of income, and wants to start investing. They are trying to decide Roth or taxable account. Because they make so little money, their marginal tax rate will be 0%.

Looking at the taxable account. They invest all the money into a good index fund and never touch the shares, except to reinvest the dividends. When they sell the shares 4 decades later when they are retired, they will owe capital gains tax on the growth. During those decades they also had to pay taxes on the dividends in the year they were earned. Now those reinvested dividends do have a different cost basis, but if there was growth there will also be capital gains taxes.

Looking at the Roth. They invest the money into a good index fund, and never touch the shares except to reinvest the dividends. When they sell the shares 4 decades later, there are no taxes. During the 4 decades there were also no taxes on the dividends.

You do give up the flexibility to spend all the money in the Roth unless you follow the tax laws. But if you know the funds are for retirement then the Roth is better than a taxable account, especially in the early years of your career.

Of course as your income grows during your career, the Roth advantage over the traditional IRA/401(k) is diminished because the current marginal tax rate and the future marginal tax rate are closer together.

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