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One of the most important financial responsibilities that every person has is to properly prepare for retirement. To help people plan for retirement, there are various financial products that provide various incentives for saving. One popular retirement product is a Roth IRA. While a Roth IRA is similar to other retirement investing products, there are various characteristics or Roth IRAs that separate them from traditional IRAs and other retirement accounts.
The main characteristic that separates a Roth IRA from other retirement accounts is that the contributions are not tax deferred. While this means that a person will have to make contributions with after tax dollars, this is not necessarily a disadvantage. If an investor is young, or expects to be in a higher tax bracket upon retirement, the investor would be better off taking that tax hit now as opposed to later. Also, investing if a person feels tax rates will increase in the future, then taking the tax hit now also makes financial sense.
One advantage of investing in a Roth IRA, and other non tax-deferred accounts, is that money may be withdrawn tax free at any time. Also, with a Roth IRA, after money invested has met the five year seasoning requirement, withdrawals may be met penalty free regardless of the age of the investor. Similar withdrawals made out of a traditional 401k or IRA would come with not only, but also a 10% penalty for early withdrawal for a person less than 59 and a half years old.
Another advantage of investing in a Roth IRA is that there are no withdrawal requirements. Tax deferred accounts, such as a 401k, require a person to begin withdrawing from their fund by the age of 70 and a half years old. Since a Roth IRA investor has already paid taxes on their investment, they are not subject to such requirements. This will allow a person to keep their funds in their Roth IRA for a longer period of time, which will allow it to continue to grow tax free.
