Some Reasons a Roth IRA Could Be Right For You

Crossword puzzle and pencilIn the 1980s the individual retirement arrangement was established by Congress to allow Americans to set aside money for their retirement. We now refer to this as the traditional IRA for in 1998 Congress created an alternative called the Roth IRA which has several advantages over the traditional IRA in many cases. The Roth IRA is a very different animal than the traditional IRA and has many features that the original did not. For most people there are several Roth IRA advantages that we will look at. This article will examine some of the advantages of the Roth IRA.

Far and away the preeminent advantage of a Roth IRA is that, upon reaching the retirement age, one can withdraw money without paying taxes on the gains. The alternative arrangement in the Traditional IRA allows one to take a tax deduction upon putting their money into the IRA but they have to pay taxes on it when they withdraw it. What this boils down to is a simple question of exchange. Do you want to take a gauranteed tax break up front or hope for a much larger tax break in the future. The Roth IRA owes its tremendous popularity to this feature; the fact that money is allowed to grow and be withdrawn tax free.

With the way that the current tax code is constructed, the traditional IRA offers a guaranteed tax break on the initial contribution. Unfortunately, there is a downside to this as well. Later in life, when retirement arrives, you will be forced to pay taxes on the growth of your money. Another issue is that the money upon withdrawal is taxed as income as opposed to as a capital gain. Therefore, if you are in the 28% income tax bracket, more than a quarter of your money will go to the tax man.

Another key component of the Roth IRA (and this is true for a traditional IRA as well) is that within your account you are not taxed on individual transactions. Unlike a regular brokerage account, an IRA shelters you from taxable events until it is time to withdraw the money (traditional IRA) or forever (Roth IRA). Therefore, if your time horizon is especially long, an IRA is great choice of vehicle for your investments.

Another advantage of the Roth IRA over the traditional IRA is that you are not forced to take distributions at any particular age. In a traditional IRA, once you reach the age of 70 and 1/2 you are required to begin to withdraw your money or you will face a penalty. However, with the ROth IRA there will be no point where you are required to take money out by law. In fact, you can continue to fund your Roth IRA (without withdrawing any money) until you are 100 if you so desire.

A key question for the future however is whether the IRA will become a thing of the past. Some have asserted that Congress will have a tough time keeping their hands off of this retirement money for so long. The reason for this is simple. Many believe that government wants their cut of this money and so they will take it. Because of this, many wonder if the main argument in favor of the Roth IRA, the tax advantages, will become moot. So the Traditional IRA, which offers an upfront tax advantage may be the safer way to play it. At this point, it seems uncertain that the current system will be maintained indefinitely. Depending upon your time horizon before retirement, you will have to judge if you believe the government can keep its hands off your money for that long before making your decision.

This sums of the key differences between the Roth and Traditional IRAs. There are many other factors to consider when planning for your retirement including IRA limits and Roth IRA limits so make certain to do your due diligence before deciding on a course of action.

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