The Benefits of Choosing a Roth IRA

A Roth IRA is an individual retirement plan that is similar to a traditional IRA in many ways. One of the primary differences, though, is that contributions to a Roth IRA are not tax-deductible and the qualified distributions from a Roth IRA account are tax-free. Like other retirement accounts, non-qualified distributions are subject to penalty at the time of withdrawal.

Like a Traditional IRA, a Roth IRA is more flexible than other retirement plans, like a 401(k), because it enables you to invest it in a variety of instruments, including stocks, bonds, and mututal funds.

The Roth IRA option was established in 1997 and offers several distinct features, the primary one being that all withdrawals are tax-free, as long as the required conditions are met (you must be at least 59 and ½ years of age with an account that was set up at least five years ago).

With a Roth IRA, there is no age limit on contributions. Additionally and unlike a traditional IRA, there are no mandatory minimum distributions at age 70 and ½. Roth IRA account holders appreciate this for the opportunity to capture more savings for their beneficiaries. And, you are allowed to withdraw money from your account at any time without having to pay taxes for your contributed amount.

Please note that you can contribute to a Roth IRA only if you have earned income from a job. There are also limits for how much income you can earn and still be eligible to contribute to a Roth IRA. For 2008, you may contribute up to $5,000 as long as your income as a single person falls below $101,000 or below $159,000 if you are married and filing jointly. The contribution limit falls below the $5,000 maximum and is phased out for other income ranges. Many financial advisors will, therefore, suggest to young people that they contribute to a Roth IRA before their income disqualifies them from participation.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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