Roth IRA advantages over traditional IRA and 401k plans

In 1997 the Tax Relief Act was signed into law and from it the Roth Individual Retirement Account (IRA). Named for its initiator, former Senator William V. Roth, the

Roth IRA offers an alternative retirement investment plan to the traditional IRA and company sponsored 401k plans.

Roth IRA contributions are made with after-tax dollars

The greatest difference between a Roth IRA and most other retirement plans is that it uses after-tax dollars to make the contribution. Most contributions made into an IRA or 401k account use pre-tax dollars.

Roth IRA assets are never taxed

The Roth IRA may never be taxed and has far fewer withdrawal restrictions when compared to IRAs or 401k accounts where you are taxed when the money is withdrawn and used.

You keep 100% of your portfolio gains

The real power of a Roth IRA lies in its ability to capture and retain compounded investment growth for your own retirement needs.  Unlike a 401k or traditional IRA plan, Roth IRA plans do not give up a large percent of your accumulated wealth in the form of taxation every time a withdrawal is made.

Everything you need to know about Roth IRAs

A quick review of the major Roth IRA guidelines and decisions you will need to make to maximize this powerful tax-free retirement plan.

Contributions to Roth IRAs

Roth IRAs do not have strict requirements about when you have to start making withdrawals as do other IRAs. With an IRA, the owner is required to start making periodic withdrawals at the age of 70 ½ years old or risk forfeiting a portion of their savings to the government. These withdrawals are then taxed at the retiree’s current tax rate, generally lower than that from when they were working. With a Roth IRA, if the funds are not currently needed they can be left in the account for as long as the owner would like while they continue to earn interest. When the funds are needed, they can be withdrawn and often usually free of any taxes.

Deciding on whether a Roth IRA is the best investment choice needs to take into consideration personal lifestyle and the prospect of retirement income. If greater tax deductions are needed to offset higher earnings, then a traditional IRA or 401k plan offers that type of tax deferral. However, if retirement income is expected to exceed current income from such sources as inheritances or other investments from mutual funds, the stock market or the sale of property, then having a tax-free source of income in retirement may be advantageous. If it is certain that the funds from a Roth IRA will not be needed by age 70 ½, and are going to be used primarily to leave as and inheritance or act as back up income then a Roth IRA may be the right choice.

If there is the chance the funds from a retirement account may be needed well before retirement, then a Roth IRA offers more flexibility with and fewer restrictions than other retirement accounts. If savings toward a first home are not enough, funds from a Roth IRA can often be used free of penalty. If large medical bills unexpectedly arise, then those Roth IRA funds are also more accessible than monies in other types of retirement accounts. Not only are they more accessible, but the restrictions will ultimately save money with fewer penalties and no taxes, since the funds were taxed prior to investing.
 

Next: Roth IRA eligibility rules >>