When Does a Roth IRA Make Sense?
A Roth IRA is a special type of retirement account that allows you to take advantage of certain tax benefits while saving for retirement. This type of retirement account is not for everyone, but it can be useful for certain people. There are a few factors to consider when thinking about whether you should get a Roth IRA or a traditional IRA.
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What is a Roth IRA?
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The Roth IRA is a type of account that allows you to save money for retirement on an after-tax basis. Once you put the money into the account, you can then invest it into various securities like stocks and bonds. The money that you earn from the securities is not taxed while it is in your account. Then when you take the money out of your account during retirement, you also do not have to worry about paying taxes on it.
Tax Brackets
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When you are trying to decide whether you want a Roth IRA, you need to consider your tax bracket. You also need to consider what tax bracket you expect yourself to be in once you reach retirement age. If you are in a low tax bracket now, you may want to go ahead and pay your taxes at this time. Then, you can get them out of the way and if you are in a higher tax bracket during your retirement years, you will not have to pay more money in taxes.
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Meeting Income Limits
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Not everyone is eligible to contribute to a Roth IRA. If you want to contribute to the Roth IRA, you have to meet the income limits that are associated with this type of account. You have to make below a certain amount of money before you can contribute to the account every year. For example, as of 2010, you have to make less than $167,000 as a married couple or less than $105,000 as an individual.
Access to Funds
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If you would like to maintain some access to your retirement savings, the Roth IRA makes a lot of sense. With the Roth IRA, the money that you directly contribute to the account can always be taken back out again. When you take money back out of your Roth IRA, you will not have to pay any penalties on it. The only time he has to worry about penalties is if you take money from the earnings of your investments.
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