A Roth IRA is a retirement plan with great flexibility, this accounts for its popularity. Along with flexibility comes a few Roth IRA rules, advantages, and disadvantages. To obtain money from an account tax free a few rules apply. The account must be at least five years old currently, and for amounts drawn on growth over principal the owner must be 59.5 years old. The only other rules apply to income levels, regarding how much money can be contributed.
If you have an existing IRA converting to a Roth IRA is easy, and the funds transferred can be withdrawn penalty free. The transferred funds must be at least five year’s old to be penalty free. Assets in a Roth IRA can be passed to heirs unlike social security.
A Roth IRA does not require distribution based on an owners age. All other tax deferral retirement accounts assign a specific age when withdrawals have to start. Since a Roth IRA has no begin date on withdrawals the total amount of funds can be passed to a beneficiary, irregardless if the owner dies or if the funds are just not needed.
One of the draw backs to owning a Roth IRA is that at certain income levels the ability to contribute to the fund is restricted. Basically if a person makes to much money according to the guidelines only so much money can be contributed to the fund if any at all. Also placing money into a Roth IRA does not change a persons adjusted gross income (AGI).
When contributing money to a traditional IRA a persons AGI can change. This can lower an individuals taxable income, allow tax credits, and deductions. The amount of tax credits and deductions can increase as a person slides down in income level. As with all retirement plans research should be done to decide which plan works best for each persons individual needs.
- Retirement Plans; A Roth IRA (2009tax.org)
- Knowing the Roth IRA Tax Rules (2011tax.org)
5 thoughts on “A Flexible Retirement Plan;Roth IRA”
I think that if more people understood what tax deferred actually means, they’d all opt for a Roth IRA.
Virtually every other retirement plan is tax deferred, meaning that while you’ll get a tax deduction this year, you will pay tax on the contributions and any earnings on it at withdrawal. What you’re really doing then is shifting the tax burden into the future under the assumption that your tax rate will be lower. With government deficits being what they are we shouldn’t be so quick to assume it.
Roths will be tax free at retirement. No tax deduction now means no tax liabity later–it’s a true pure play. You know what you’re dealing with and don’t need to speculate.
Tax fee (the Roth) vs. Tax deferred (everything else)–is there really a debate???
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