About Roth IRA Accounts
A Roth IRA is an Individual Retirement Account. Basically, it is a retirement investment savings vehicle with specific tax benefits. It is often used as a supplemental retirement savings vehicle to enhance the traditional employer sponsored 401(k) plan. It is often a good compliment to the traditional IRA, but because there are stark differences in the tax benefits of each, the differences need to be examined to understand whether investing in a Roth IRA makes sense for every individual.
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History
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Roth IRAs were created in 1996. They are named after William Roth who was a Senator of Delaware. Senator Roth was the chief legislative sponsor for the Roth IRA.
Benefits
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The main benefit of a Roth IRA lies with its tax structure. Tax free withdrawals come into play when the account has been in existence for at least five years and the owner is 59 1/2 years old. Capital gains, dividends and interest (qualified distributions) are not taxed when the transactions are incurred inside the Roth IRA account. Therefore, earnings are accrued tax-free. Other benefits include no early distribution penalties for early withdrawals either. There is also no minimum distribution at 701/2 years of age as in the traditional IRA. Bottom line, with a Roth IRA, it is easier to withdrawal your money or keep it in the account to continue to earn tax-free returns.
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Considerations
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In a traditional IRA, contributions are tax deductible. While earnings in a Roth IRA are accrued tax-free, contributions are not tax deductible. Additionally, there are upward limitations on the amount of contributions into a Roth IRA.
Potential
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Simply having your traditional employer sponsored 401(k) plan may not be enough for retirement. Having a Roth IRA allows the investor to save more and grow more income for retirement since the earnings of the Roth IRA accrue tax-free. Additionally, the Roth IRA can act as a security blanket in cases of emergency since there are no withdrawal penalties after the age of 591/2.
Size
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In 2008, the maximum contribution for Age 49 and below was $5000. For age 50 and above it is $6000. Because of inflation, beginning in 2009, the contribution limits will be increased by $500 increments.
Warning
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Contributions to a Roth IRA are not tax deductible. Since you don't get a tax deduction, the Roth IRA does not lower the taxpayer's adjusted gross income. Further, there are maximum contribution limits and the eligibility to contribute phases out once an individual meets a certain income level.
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