Roth IRA Information
The Roth IRA is a newer retirement investment account designed to help individuals to build their retirement nest egg. In contrast to a Traditional IRA, the contributions made to the Roth IRA are not tax deductible. Also, the funds when withdrawn from the Roth IRA after the age of 59½ are tax free, unlike the Traditional IRA which is taxable when the funds are withdrawn.
There are restrictions to the Roth IRA that need to be taken into consideration, primarily income and contribution amount restrictions for the individual investor. There are annual income limitations, limiting individuals who earn over a specified amount annually which can exclude certain investors from being able to take advantage of this investment vehicle.
Some advantages to the Roth IRA include:
- Traditional IRA’s can be converted into Roth IRA’s with restrictions. This can be a tremendous advantage to individuals who are eligible, as they can pay taxes on the Traditional IRA funds today and then allow those dollars to grow on a tax deferred basis and then ultimately to withdrawal them tax free after the age of 59½.
- The withdrawals on the funds invested into the Roth IRA’s are tax free when they are taken out after 5 years or the age of 59½.
- Individuals who are eligible can save into the Roth IRA plan in addition to other qualified plans, allowing them to diversify their portfolio in terms of tax treatment.
- The tax free benefits to a Roth IRA offer individuals in retirement relief when they are receiving their retirement funds as income.
- There are not age requirements for distribution with a Roth IRA as they are with Traditional IRA’s. This can save investors a tremendous amount of money and taxes, as forced distributions that occur after the age of 70½ can push an investor into a higher tax bracket than desired.
- Investors can build their own desired portfolio within a Roth IRA, including mutual funds, individual securities, real estate and other investment options. With this flexibility, an investor can build an ideal portfolio based upon their own personal asset allocation.
In addition to the numerous benefits of Roth IRA’s, there are also some disadvantages as well. Some of these disadvantages include:
- The contributions to a Roth IRA are not tax deductible. In contrast to the Traditional IRA which offers the ability to deduct contributions for some individuals, the tax benefits of today need to be weighed against the perceived and possible tax free benefits of the future.
- The ability to contribute to a Roth IRA is based on income, with phase out restrictions. These limitations can exclude certain individuals from being able to leverage this investment choice.
- There is an annual limitation to the amount eligible to contribute on an annual basis per investor. This amount is adjusted annually and should be fully understood prior to any investment decisions being made. Also, for investors who are eligible to contribute, it is advised to maximize the contribution limitation, as there is not a make up contribution for most investors.