Individuals who are saving for retirement can choose from a variety of investment vehicles. Some of these investments are more advantageous than others, depending on their income and tax status. The Roth IRA has become a popular method for many people because of the tax advantages that result.
Why Is A Roth IRA Different
The traditional individual retirement account, or IRA, was implemented in 1974 to help Americans save money for their retirement years more easily. In 1997, another type of IRA, called the Roth IRA, was proposed that provided other additional advantages for saving for retirement. In some respects, such as penalties for early withdrawal, the Roth was similar to the traditional IRA. There are also annual limits on the amount of money you can put in a Roth IRA. However, in other respects, like the rate of taxation, the Roth was significantly different. A Roth IRA can be a good idea for people of all ages.
Advantages of the Roth IRA
· At retirement, withdrawals from a Roth IRA are not taxed. Instead, money placed into a Roth IRA is taxed up front, allowing the person to enjoy tax-free money at retirement.
· Roth IRA’s offer flexibility for changing needs. Withdrawals from the contribution amounts can be made without penalty. The money can be used to cover the down payment for a first home, go toward educational expenses or be used to pay uncovered medical expenses. However, if money from earnings or growth of the account is withdrawn, penalties may apply.
· If the holder of a Roth IRA dies, the spouse inherits the IRA automatically and can roll it into another of his or her Roth IRA accounts without penalty or tax liability. If you plan your estate for grandchildren or others, they can receive the money without having to pay taxes on it.
· You can continue to contribute to the account after age 70-1/2. A traditional IRA requires withdrawals from the account after age 70-1/2. The Roth IRA does not have this requirement, and you can continue to add to a Roth IRA after that age.
· Although Roth IRA contributions are limited at certain income levels, earners can still contribute to a traditional IRA, and then convert the account to a Roth IRA to get the additional benefits.
· The Roth IRA is usually the best option. Roth IRAs allow individuals to pay taxes up front for tax-free money later on which can be kept in the account for a longer period of time. These advantages make them a better deal than the traditional IRA for most people.
What Can Constitute A Roth IRA Investment
You can put a variety of different types of investments into a Roth IRA, much like a traditional IRA. Stock mutual funds, individual stocks, bond mutual funds, mixed investment mutual funds, exchange-traded funds, certificates of deposit, real estate and some exotic investments are eligible. However, some investments cannot be placed in a Roth IRA. These include collectibles and whole life insurance. Many experts recommend putting your riskiest investments in a Roth IRA, which allows them to stay in the account for the longest period of time to yield the best results.