I am trying to decide if opening and contributing to a Roth IRA would be a better option than contributing over and above what my company matches in my 401K. If you are thinking in terms of saving for your retirement, then the Roth IRA can prove to be a fruitful option. A Roth IRA may be a retirement option for many.
To set up a Roth IRA for retirement savings, it must be done with a financially institution approved by the Internal Revenue Service. There can be retirement advantages to a Roth IRA, primarily that the taxes have already been paid and there are none due upon withdrawal. In the case of the Roth IRA, the money you pay in comes from your net salary in other words, you have already paid the income taxes on it.
If he also paid a 35% tax on this money, after paying the income taxes, he would net $5,605,002. It is important to note that the entire amount used to convert a regular IRA account into a Roth account, is subject to income tax. If you are single and your adjusted gross income is higher than $95,000, or $150,000 if you are married, the amount you can contribute to a Roth IRA begins to decrease.
For 2005, the contribution limit to a Roth IRA is $4,000 if you are under age 50 and $4,500 if you are 50 over. In general, if your only IRA is a Roth IRA, the maximum 2005 contribution limit is the lesser of your taxable compensation or $4,000. If you put the maximum into a ROTH each year for your child beginning in 2005, when he/she is age 16, and continuing through 2010, when he/she will turn 21, and no other contributions are ever made, the account could grow to as much as $500,000.
Regarding distributions, you can make withdrawals from this account after a period of five years, beginning from the first year when the contributions were made into the Roth IRA account, though there are certain conditions that have to be met. An individual cannot contribute more than $4,000 to the Roth IRA Account, though he may have a large number of such accounts. You can contribute 100% of your child's earnings to the account, up to a maximum of $4,000.
If you exceed the income limits you can neither contribute to nor roll over other IRA money into a Roth account. You can make contributions to a Roth IRA for your spouse provided you meet the income requirements. Taxes although your 401K contributions are tax deferred, which allows more of your money to go to work for you, money invested in a Roth IRA grows tax free.
With the Roth IRA, you may have the opportunity to save more money for your heirs than with a traditional IRA, especially if you live a long time. Simply stated, the Roth IRA is an IRA that individuals make contributions to on an after tax basis contributions to a traditional IRA may be made with pre-tax money. With the Roth 401(k), you do not get the upfront tax deduction that you get with traditional 401(k) and IRA plans.
If you are not sure whether you are better off with the tax deduction now or the tax free income later on, you could always split your contributions by investing in both a regular 401(k) plan and the new Roth 401(k). Your heirs will not be required to pay tax on the benefits received from your Roth IRA plan. A Roth IRA is considered to be a good retirement plan, as it provides certain tax benefits.
Because most people's tax rates fall in retirement, most people should not use a Roth or convert existing an IRA to a Roth. As you can see, it is possible that many people could come out better putting at least a portion of their retirement funds into a Roth IRA. In this article we have covered 7 of the powerful investment benefits you can reap holding a Roth IRA plan.
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