As a result of the Taxpayer Relief Act of 1997, on January 1, 1998, the Roth IRA was born. The Roth IRA is named after the late Senator William V. Roth, Jr, and had provided investors with an excellent option for retirement investing.
With a Roth IRA, the earnings on contributions are withdrawn tax-free and penalty-free as long as certain time frame and situational conditions are met. There is also no mandatory distribution age, as seen in traditional IRAs.
You may have many questions when it comes to investing in a Roth IRA. Who can contribute to this type of individual retirement account? How much can I contribute to a Roth IRA? When can I withdraw funds? Fortunately, a Roth IRA is a tax-advantaged account that is simple to invest in, and withdraw from, provided you meet the criteria for investing and distributions.
What Are The Benefits To Investing In A Roth IRA?
There are apparent advantages to the Roth IRA. The most obvious is the ability to earn tax-free returns on your investments. This is especially attractive if you expect to be in a higher tax bracket when you reach retirement age, as with a Roth IRA, ordinary income tax is paid on contributions, and funds are withdrawn tax-free.
A drawback to investing in a Roth IRA is that the contributions are not deductible on your tax-returns, therefore, the tax benefits are not immediately realized. Which is more important depends on your personal current and future finances, although most people benefit more from a Roth IRA.
The main reason people are better off in a Roth IRA versus a traditional IRA is that Roth IRAs are effectively bigger than a traditional IRA due to the fact that it holds after-tax funds. By maximizing your contributions, you can get the most out of this feature and add greater tax leverage to your retirement savings.
How Much Can I Contribute To A Roth IRA?
It is easy to open a Roth IRA, and you can establish an account at a number of online brokerages such as ETrade, or Zecco and many do not require minimums for opening an account. You may establish a Roth IRA by contributing regularly to the fund, or by converting a 401k or traditional IRA to a Roth IRA.
In order to qualify to invest in a Roth IRA, you must not exceed certain income requirements, and as of 2010, you can not contribute more than $5,000 if you are under 50, or $6,000 of you are above the age of 50. As your income grows above the predetermined levels set by the government, your contribution limits will be phased out, and eventually eliminated.
In 2010, the limits placed on Roth conversions were lifted, and although you would have to pay taxes on the year you converted the funds, for most people the savings over the long-term are worth the taxes paid on the conversion.
There are many benefits to investing in a Roth IRA, but it may not be appropriate for every circumstance. Carefully review your investment objectives, risk-tolerance, and time frame for investing before committing any capital to this or any other retirement account.
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