Many people are looking for ways to save money for retirement. Most have heard about a Roth IRA but many do not know what a Roth IRA is. Roth IRA is the term used of an Individual Retirement Account (IRA) that gets its name from Senator William Roth who was instrumental in the development of this program.
The most common choices of retirement plans that are available to people outside of an employment arrangement are the traditional and Roth IRAs. For many determining the difference between the two programs can be difficult. Deciding which you are going to use is s decision that must be made when the account is started. The earlier you make the decision the earlier you can start saving money for retirement.
The Roth IRA is not an arrangement that is for everyone. This is an arrangement where the deposits made into the account are not tax deductible on the contributor’s tax return. This is different from the way that a traditional IRA works which allows a deduction on the tax return of the contributor. With the Roth IRA you are only taxed on the money that is contributed in the year that the contributions were earned.
As the contributions made to a Roth IRA grow they grow tax free. This is a feature that the Roth IRA has in common with the traditional IRA. You do not pay any tax on growth each year.
Withdrawals from a Roth IRA are limited until the participant has reached age 59 ½. There are exceptions to this rule that apply to all qualified retirement plans. There are however no taxes paid when you begin to make withdrawals. This can be an advantage since you do not have withdrawal additional money to cover taxes due. This can mean your nest egg could last longer. It is also likely that your tax bracket will increase over time if you simply have income increases to match inflation. If on the other hand you feel you will be in a lower tax bracket at retirement, you may want to take the option of a traditional IRA.
There are also differences in distribution requirements. The Roth IRA does not have mandatory withdrawals at age 70 1/2. This can be a big advantage if you do not need or want the income. It can still continue to grow tax free.
The Roth IRA has no effect on your adjusted gross income (AGI). This means you are not able to drop your income into a lower bracket by making contributions. This is an advantage to the traditional IRA.
The Roth IRA is not for everyone but is a great vehicle for many people. Sit down with your financial or tax advisor and decide if it is the right way for you to go.
By Arnie Fontenot