What Is a Feature of a Roth IRA?
Both traditional and Roth IRA accounts can be valuable retirement savings vehicles, but it is important for investors to understand the distinctions. Roth IRA accounts have a number of benefits, from the way they are treated at tax time to the absence of the required minimum distribution.
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Tax Treatment
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Roth IRA investors do not get an immediate tax deduction when they put money into their plans. But what they do get is tax-free treatment in retirement. Investors who follow the rules established by the Internal Revenue Service can withdraw the money in their Roth IRA accounts without paying any Federal income tax on the proceeds, essentially creating a steady stream of tax-free retirement income. That makes the Roth IRA an excellent choice for investors who feel that taxes will be higher in the future than they are now.
Contribution Limits
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The contribution limits are the same for both traditional and Roth IRA accounts. As of 2011, workers can invest up to $5,000 annually in their Roth IRA accounts, plus another $1,000 if they are 50 years of age or older. The entire Roth IRA contribution must come from earned income; unearned income, like interest and dividends, is not eligible.
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No RMD
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Traditional IRA accounts are subject to the required minimum distribution or RMD requirement, meaning that investors must start taking required minimum distributions from their accounts when they reach age 70 1/2. Investors who fail to take the necessary RMD are subject to a tax penalty equal to 50 percent of the money that should have been taken out. Roth IRA accounts are immune from this RMD requirement, giving investors the freedom and flexibility to take as much, or as little, from their accounts as they like. Roth IRA investors can choose to not take a distribution if they do not need the money, with no tax penalty whatsoever.
Investment Options
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As with traditional IRA accounts, you can invest your Roth IRA money in a number of different ways. You can open a Roth IRA with a mutual fund company and invest the money in a wide variety of mutual funds, including stock funds, bond funds and money market funds. But you can also open a Roth IRA with a brokerage firm and use the money to buy and sell individual stocks and exchange traded funds. In fact, a Roth IRA makes the perfect vehicle for stock trading, since the profits on those transactions are not subject to capital gains taxes.
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