What is a Roth IRA?
A Roth IRA is an alternative to a traditional IRA and may provide future tax benefits to some individuals. The advantage of a Roth IRA is that it provides tax-free earnings on after-tax contributions. Because your contributions have already been taxed, you can withdraw them from a Roth IRA at any time tax-free. Generally, if your account has been open for at least 5 years, your earnings are tax-free when you withdraw them. However, you must usually be 59 or older in order to avoid paying a 10% early withdrawal penalty tax on your earnings. (There are some other exceptions to the withdrawal penalty tax.) Another advantage of the Roth IRA is that there are no required minimum distributions for participants at age 70 or older. Other rules apply that may affect your eligibility for a Roth IRA and the tax-free earnings advantage. You can find out more information about Roth IRAs at the Internal Revenue Service web site, www.irs.gov, or from your tax advisor.
This type of IRA is named after Senator William Roth, chairman of the Senate Finance Committee and an advocate of Individual Retirement Arrangements. Like traditional IRAs, there is a maximum contribution of up to $2,000 per year that can be made to a Roth IRA, or, in the aggregate, to both a traditional and Roth IRA. Unlike traditional IRAs, no portion of contributions to a Roth IRA can be deducted from taxable income. However, investment earnings within a Roth IRA are not subject to income tax, and withdrawals from the Roth IRA are entirely free of federal taxation and tax penalties under certain conditions.
A Roth IRA is a tax-deferred retirement account that turns the traditional IRA formula on its head: although retirement contributions are taxed up front, withdrawals can be made completely tax-free once you reach age 59 1/2 and have had a Roth IRA for five years. For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA allows investors to effectively shelter more money for retirement. Although the annual contribution limit is the same for both traditional and Roth IRAs, because your Roth contribution is made with after-tax income, the full $3,000 (or $3,500 if you’re age 50 or older) can compound substantially over the years without incurring any future tax liability. The amount you can contribute to a Roth IRA may be reduced or eliminated depending on your filing status and your adjusted gross income level. Whether the Roth IRA is a better option really depends on your expectation of your futu
The differences between a regular IRA and a ROTH IRA are many. You can deduct contributions to a regular IRA, but not to a ROTH. When you pull money out of a ROTH (at retirement age), it is tax-free, but taxable from a regular IRA. You can pull out your original contribution at any time from a ROTH without penalty, however, anything pulled out of a regular IRA has a 10% federal tax penalty put on it if it is pulled out before retirement age. I’m sure there are more differences, but those are the ones I can think of off the top of my head. INVEST NOW, best advice I can give anyone.
