For many years I contributed to my company 401K plan which is a traditional IRA account. It is a great plan since my employer matched a portion of my contribution and I was able to use pre-tax dollars. However, it lacked some of the flexibility that I wanted for retirement, so I learned about the benefits and differences of Roth IRA plans.
The many Benefits include: tax free growth; tax free withdrawals (if qualified); tax free, penalty free principal withdrawals; tax free, penalty free withdrawals (at age 59 1/2).
Although you contribute to the account with your after-tax dollars, all withdrawals are tax free if you meet the following conditions:
You are at least 59 and a half years old.
The account has been in existence for at least five years.
To make sure that your withdrawal is a qualified distribution and not taxable, more information is available from the IRS.
If you buy a stock, and it pays a dividend you receive the entire dividend tax-free. The ability to have investment earnings free of taxation is great; however, when you contribute to your Roth IRA there is no deduction.
As in the case of a traditional IRA plan, there are no mandatory minimum distributions at age 70 and a half.
You can withdraw money at any time without paying taxes up to the amount of your contributions.
There is no age limit on contributions.
Who is eligible?
You can establish a Roth IRA even if you have a 401K or other retirement plan through your employer. Effective 2011 your contributions can be as much as $5,000 and $6,000 if you’re 50 or older by the end of the year.
You must have qualifying income at least equal to the contributed amount.
Under US laws, your modified adjusted gross income cannot be more than $107,000 for an individual or $169,000 for a married couple filing jointly.
It’s great that you can convert a traditional IRA account to a Roth IRA. Taxes will need to be paid in the year of the Roth IRA conversion. But for most the long-term savings outweighs the tax implications.
How do you get started?
First you will have to find a bank like Discover Bank or an investment company to set up your Roth IRA account. It is always a good idea to do some homework and learn about who will be managing your money.
I know there is a lot more that you’ll want to know before investing into a Roth IRA or any retirement account for that matter. I hope that I have highlighted some of the key benefits and flexibility of a Roth IRA for you.
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