Tax Free Growth - America's Love Affair with the Roth IRA
For most Americans, having enough money in retirement savings, pensions and Social Security to be able to enjoy a reasonable standard of living when they retire is a very important goal. With so many different ways to save for this time in your life, the scenery can become more than a little blurry. Some forms of retirement savings offers ways to reduce your taxes now, yet leave you paying more in taxes later. However, only the Roth IRA lets your money enjoy tax free growth now and take it back out after you retire, without having to pay any more in taxes.
Tax Free Growth
The number of people who do not know what makes Roth IRA retirement accounts so popular is somewhat amazing. While there may be several other reasons for their popularity, the main reason is that your money can enjoy tax free growth for as long as you leave it in the account. Your money can go into any investment you choose and any money that it earns is yours completely untaxed. To make things even better, you won't be taxed on your money when you go to take it out of your account after you retire. This total lack of taxation is why so many Americans have fallen in love with the Roth IRA.
You Have to Pay the Price
The Romans had a phrase for it, "caveat emptor" or let the buyer beware. In this case, your Roth IRA does not come without a price of its own. While you will not have to pay taxes on the money earned in your Roth or when you withdraw it, you do have to pay your income taxes on the money you are originally putting into your account. You do not get a tax deduction for any of the money you put into this account. Instead you must pay your taxes now rather than later when you retire. In most cases this will save you a lot of money.
Tax Deferred vs. Taxed Income
Any contributions you make to a traditional type of IRA are considered tax deferred. In other words you do not have to pay taxes on this money until you withdraw funds from your account. Your savings are immediate, but there is also a price you will pay later. This is because every dollar you withdraw will be subjected to income taxes. If as has been known to happen the tax rates increase, you will end up paying more in taxes when you retire than you would have if you had paid your taxes before putting the money in a Roth IRA.
Paying Less Now
Tax free earnings are not the only reason why so many people choose a Roth IRA over a traditional IRA. By choosing this type of account, you could easily end up paying far less in taxes now and in doing so manage to avoid dealing with higher taxes in the future. As your Roth IRA earnings will continue growing tax free, you will only pay taxes at your current tax rate on the money you plan to deposit. If the rates should happen to increase or worse yet, you retire in a much higher tax bracket; you will have already paid all of the taxes on your money at the lower rate. This may be one of the best ways to ensure you have the money you need when you retire.
There is a Downside
No matter how good this type of retirement account is, there has to be a downside. Since the Roth IRA offers such amazing tax free growth, the IRS has capped the maximum annual deposit at a very low level. In this case, you are limited to a maximum deposit of $5,000 per year. If you are over the age of 50, the IRS allows you to deposit and additional $1,000 per years as what is referred to as a catch up. There are also income limitations regarding when your ability to contribute to a Roth IRA will begin to disappear. This begins when your AGI is $173,000 and when your AGI reaches $183,000. Despite these issues the Roth IRA is still considered to be the best possible form of retirement camp.
If you are looking for a way to enjoy true tax free growth in your retirement accounts, there is only one type of IRA which makes this possible. Not only is all of your money tax free after it has been deposited, it remains tax free after you start withdrawing it. This is because all of the money you put into your Roth IRA is post tax money, meaning you have already paid your income taxes on it. The only downside is that you are limited to how much money you can put into your account each year, a small price to pay for enjoying tax free savings.