Why Choose a Roth IRA
A Roth IRA puts a twist on the concept of a traditional individual retirement account. The tax rules that apply specifically to a Roth IRA may benefit you in the long run financially, especially as it concerns the distribution on your funds. In addition, age limits regarding contributions and distributions are less strict for Roth IRAs than for traditional IRAs.
Other People Are Reading
-
Taxes
-
With a traditional IRA, whenever you withdraw funds from the account you owe federal and state taxes on the distribution. In contrast, you owe no taxes on Roth IRA withdrawals as long as you have had the account for at least five years. The catch is that unlike traditional IRAs, where contributions are tax deductible, contributions to a Roth IRA are made on an after-tax basis. Thus, a Roth IRA does not reduce your taxable income. However, once in your account the money and all the interest it generates is tax free and you do not need to worry about whether rising tax rates will cut into your investment upon withdrawal.
Penalties
-
For withdrawals from a traditional IRA before age 59-and-a-half, you owe a 10 percent penalty on top of taxes unless you meet specific criteria for an early withdrawal. The rules for withdrawals from a Roth IRA are different. You will not owe taxes on the part of your withdrawal that you contributed, although you will owe taxes on the part that your contributions generated through interest. However, Internal Revenue Service regulations allow you to withdraw up to $10,000 without penalty for the purchase of a first home, as long as you have had your Roth IRA for at least five years.
-
Age
-
If you think you might want to keep contributing to your retirement account well into your older years, a Roth IRA is preferable to a traditional IRA. Federal tax rules prohibit contributions to a traditional IRA after age 70-and-a-half, but Roth IRA rules enforce no such limits. Furthermore, with traditional IRAs, the Internal Revenue Service levies penalties if you do not take minimum withdrawals starting at age 70-and-a-half. No penalty applies if you have a Roth IRA and choose not to take withdrawals past that age.
General
-
Roth IRAs also share similar benefits with traditional IRAs. Investment opportunities are more flexible than in employer-based retirement plans, such as 401k accounts, because you may invest stocks, bonds and real estate, as well as standard mutual funds. As well, compounding interest gives you the potential to exponentially grow your retirement savings. For example, if you invest $2,000 a year in your IRA between ages 22 and 65, you would contribute $88,000 in all. According to one model, at an annual interest rate of 12 percent, you would have more than $1.2 million in your account by age 65. In the case of a Roth IRA, that money is yours tax free.
-
References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
