Purpose of a Roth IRA, Why It May Be Better than Traditional IRAsWhat is the Purpose of a Roth IRA? What are the benefits to a Roth IRA which you do not have in a traditional IRA? There are 4 big advantages of Roth IRAs. 1. Future Tax Break Wouldn’t it be nice to have a steady stream of non-taxable income when you retire? That is what Roth IRAs allow investors to do. You cannot write off any money that you deposit into a Roth IRA, but it along with all the interest that it earns is tax free when you make a withdraw. If you believe that you will be in a higher tax bracket when you retire for whatever reason this is the best retirement plan for you. 2. Early Withdraws Available Another benefit to a Roth IRA is that you can withdraw the money you originally deposited in it tax free and penalty free. With traditional IRA plans if you invest $5,000 into it you cannot take the money out early without paying both taxes and a 10% early withdrawal penalty. With a Roth IRA if you deposit $5,000 into the plan you are free to take that $5,000 out tax free. After all you already paid taxes on it. You just cannot take out the interest that you made off of that $5,000 penalty free until you have held the account for at least 5 years and are at least 59 ½ 3. Can Contribute to both a 401k and Roth IRA Normally you can contribute to both an IRA and a 401k and get a tax advantage on both plans. However, if you are considered to be a highly compensated employee, and do this, you cannot write some or all of your taxes off on your Traditional IRA contributions. This can lead to double taxation which is where you get taxed twice for the same exact money. Luckily you do not have to deal with double taxation when you invest into both a Roth IRA and a 401k because of the way Roth IRAs work. You have to pay taxes up front regardless with a Roth IRA, but you will be able to take it out tax free later on. 4. You Don’t Have to Take it Out at age 70 ½ When you invest into a Traditional IRA you owe the government a lot of taxes, therefore they want to make sure they see that money. When you turn 70 ½ a financial planner will determine how much longer you are likely to live and will divide the money in your plan by that amount. The number they get is the minimum you will have to withdraw from your account every year. With a Roth IRA you don’t have to go through that, you already paid all of the taxes you owed so you are free to do whatever you want with your money. You can even leave it in there until you are 100 if you wish and can afford to. Should You Switch to a Roth IRA? The purpose of a Roth IRA is to get some tax free income when you retire. If you believe that your taxes will go up in the future then it might be a good idea. But if you are already approaching retirement then switching from a Traditional to Roth IRA can be pretty pointless. Return From Purpose of Roth IRA to IRA Account Rules Go From Purpose of Roth IRA to Roth IRA Rules Go From Purpose of Roth IRA to Traditional IRA vs Roth IRA
|
