Roth IRA

In 1997, the Taxpayer Relief Act resulted in the Roth IRA, born on the first of January, 1998.  There are many benefits of the Roth IRA, but getting tax deductions for your IRA contribution is not one of them!  The primary benefit of using a Roth IRA for your retirement is for individuals meeting specific requirements, all the earnings are tax free when you make IRA withdrawals of the earnings

Benefits of Roth IRA Investing

In addition to the ability to withdraw the earnings of a Roth IRA tax free, you can avoid an early distribution penalty on some withdrawals, and remove the requirement for taking minimum IRA distributions after your age of 70.5 years.  Roth IRA's contain after-tax dollars, which provides greater tax leverage on your IRA contributions.

While a Traditional IRA requires account holders to take minimum  IRA distributions beyond a certain age, the Roth IRA doesn't maintain the same requirement.  If you have other resources of retirement and money to live on, you will not be forced into taking IRA withdrawals.  This allows individuals to continue growing earnings on their Roth IRA, tax free.  It's easier to keep your money in a Roth IRA than a Traditional IRA.

It's also easier to get your money out of a Roth IRA than it is a Traditional IRA!  Certain instances allow you to take IRA withdrawals without an early distribution penalty.

Roth IRA Eligibility

You can establish a Roth IRA with an IRA rollover- converting your Traditional IRA into a Roth IRA; or you can create a Roth IRA by making regular contributions to it.  In some cases, even if you participate in your employer's 401K retirement plan, you can contribute to a Roth IRA.   The requirements of having a Roth IRA if you also have a 401K plan, is that you or your spouse must make compensation or have alimony income that is equal to the amount you contribute, and your modified adjusted gross income must be within IRA maximum limits of $95,000 for single individuals or $150,000 for married individuals (who file jointly).

If you decide to convert your Traditional IRA to a Roth IRA, you will pay conversion tax during the year you convert; however, the long term benefits of converting to a Roth IRA are typically more advantageous than the expense of the conversion tax.

Roth IRA Distribution

A favorite feature of individuals having a Roth IRA is the ability to make IRA withdrawals tax-free until you've taken out all of your regular contributions.  If you make withdrawals after that point, that money comes from earnings.  Roth IRA withdrawals are tax-free if you've held the IRA for at least 5 years, and you are over the age of 59.5 years.  If you must make an IRA withdrawal before those requirements are met, you will pay an IRA penalty for early withdrawal, and the money is taxable.

IRA vs 401K

There are differences to an employee 401K plan and an IRA, although there are now some hybrid retirement accounts being created that result in a Roth 401K account!  While the Roth IRA applies limitations based on a single or married couple's income level, the Roth 401K does not have any income limitations, so the higher tax bracket income earners can still save money tax-free if they use a Roth 401K retirement plan.

If your employer participates in matching 401K contributions, then you'll receive their contribution to your retirement fund whether you have a traditional 401K account or a Roth 401K.