As the Baby Boomer generation ages, the government has been spurred into creating incentive based retirement vehicles. The Roth IRA is one of the best.
A Roth IRA is a form of Individual Retirement Account that is available in the United States. The Roth IRA was enacted into law in 1996 through the passage of Public Law 105-38. It was named for Senator William V. Roth Jr. of Delaware who was the chief sponsor of the legislative effort that resulted in the passage of the law. The Roth IRA differs from Traditional IRAs in several important matters.
The main difference between the Roth IRA and a Traditional IRA is that contributions to the account are taxed before they are put into the account and not when they are removed. The Traditional IRA allows the owner to defer his tax obligation until retirement and the Roth IRA allows the owner to pay his taxes at the time of contributions and withdraw them after retirement without tax liability.
To understand the difference, one must predict his expected income level. If a person is earning more in his pre-retirement years, it is to his benefit to enjoy the tax breaks at that time. If his expected income will drop significantly after retirement, his tax bracket will be low enough to make the tax payments at this time easier to handle. Many people are just the opposite. They anticipate that they will have investment income that will be quite high after retirement. If this income exceeds the regular earned income during the pre-retirement period, the Roth IRA is the better choice.
A Roth IRA must be seasoned for the funds in it to be qualified for tax-free withdrawals. The seasoning period is generally five years. The account owner is allowed to withdraw up to the total amount of his contributions at any time with no penalty or tax. There are several special circumstances that allow distributions of the earnings prior to the age of 59 and a half. One such circumstance is the purchase of a principle residence for the owner, their spouse, lineal ancestors, or descendents. Up to $10,000 of qualified earnings may be withdrawn for this purpose.
The Roth IRA is free from the mandatory distribution requirement after the age of 70 and a half. This can be a big advantage over the Traditional IRA for people who are enjoying substantial earnings in their IRA. They can continue these earnings tax free in the Roth IRA and not be forced to withdraw the funds. There are disadvantages and advantages to the Roth IRA when compared to other IRA types. A full understanding of how the various plans work and a financial plan that anticipates your potential earning history is the key to making the correct selection of which plan is best for you.
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IRA information at UFCAmerica.com.
