Do I Need a Roth IRA?
A Roth IRA is an individual retirement account that allows people to have an opportunity to save money for retirement while they are still active in the workforce. Investors often consider a Roth IRA to be one of the most effective sheltered accounts available. There are a number of advantages associated with having a Roth IRA instead of a traditional IRA or another kind of savings account -- as well as a few potential disadvantages.
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Seeking Simplicity
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If you are seeking a simple retirement savings account, a Roth IRA might be one of your best options. Unlike those who own deductible IRAs, owners of Roth IRAs do not need to make any out-of-the-ordinary reportings to the Internal Revenue Service. When you own a deductible IRA, you are required to report deductions on form 1040 when you make a contribution. When you make a withdrawal, the full withdrawal amount must be reported as taxable income.
Tax Issues
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If you think that taxes are likely to rise in the future, a Roth IRA might be beneficial because you pay taxes on your Roth IRA now -- not in the future. On the other hand, if you think taxes might fall in the future, a Roth IRA might not be as beneficial because you will pay more now in taxes than you might later.
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Flexibility in Withdrawals
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When you have a deductible IRA, you are required to start making withdrawals by the time you are 70 1/2. One of the purposes of this is so that the IRS can begin to tax your withdrawals. On the other hand, if you have a Roth IRA, you do not need to begin making withdrawals from your account until you are ready because you have already paid the taxes on the money you owe.
Not for Big Savers
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You probably would not be best served by a Roth IRA if you want to save a significant percentage of your money for retirement. You may not contribute the full allowable $5,000 per year if you are single and make more than $105,000 or $166,000 if you file a joint return. The amount you may contribute incrementally decreases by percentages depending on how much more you earn than the established income limit.
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