Roth IRA may be a term you’ve heard, but you may not know
exactly what a Roth IRA is. The Roth IRA is named after its main
sponsor, Sen. William Roth. It was created an alternative to other
retirement planning options and may be the most advantageous option
for middle income earners due to its potential for tax-free growth
and tax-exempt earnings. While similar to a traditional IRA, there
are some key differences investors should be aware of.
Investments outside any IRA plan are essentially taxed twice.
Your original earnings are taxed before being invested plus your
gains are taxed when you sell. IRAs provide a tax break at either
the front or back end. Traditional IRAs provide the tax break on
the front end. Contributions are pre-tax dollars which reduce your
taxable income at the time of the contribution, your money grows
tax-free while invested in a traditional IRA, but your earnings are
taxed when you take distributions from your IRA.
Roth IRAs provide the tax break at the back end. Your
contributions are not tax deductible, so there is not reduction of
your taxable income up front; your money grows tax free while
invested; plus you pay no tax at on your earnings when you begin
taking distributions.
Some of the other key aspects of Roth IRAs include the
following:
•All IRAs have restrictions on income: one limit to be able to
receive the full benefit of the IRA and another limit to be able to
receive a partial benefit from contributing. The income limits for
Roth IRAs are higher than those for Traditional IRAs.
•Traditional IRAs require mandatory distributions beginning at
age 70.5. Roth IRAs have no mandatory distribution age.
•Direct contributions to Roth IRAs may be withdrawn tax free at
any time. This is not true for Traditional IRAs.
•Earnings on Roth IRAs may be withdrawn tax free provided the
qualifications of being at least 59 ½ and the seasoning period of
five years have been met.
•Roth IRAs include a provision for a tax-free $10,000 maximum
lifetime earnings withdrawal for the purchase of a principal
residence for a first-time home buyer.
•In general, Roth IRAs have fewer requirements and restrictions
regarding wit