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Exploring the Roth IRA

January 11, 2013

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When you select retirement savings options among many that are available in the market you can’t fail to notice The Roth IRA. You stand to benefit by way of greater flexibility in saving options for your money, and it works great for younger people.money savings

A Roth IRA is a type of Individual Retirement Arrangement that extends various tax concessions to the beneficiary if certain predetermined conditions are fulfilled.

Here we highlight some of the major features of the Roth IRA:

  • The contributions you make to the account attract taxes, but the permissible distributions are not taxable in any manner.
  • The interest earnings and investment gains which you make within the Roth IRA are not taxed.
  • As of 2012, contributions are limited to $5,000 per year, or $6,000 if you happen to be 50 years or above, and the limits for 2013 are $5,500 and $6,500 respectively. These contributions work across the board, and if you contribute to Roth IRA, the amount gets reduced from your traditional IRA, and the reverse is also true.
  • The permissible contribution sum starts getting lowered as you climb to higher income levels. Check the permissible ceilings pertaining to your filing status, especially for the current year before finalizing your contribution to the Roth IRA.
  • As we have already pointed out, the distributions are freed from any federal income tax liability, provided you have crossed the age of 59 ½ years, and your Roth IRA scheme has been in operation for a minimum of  five years.
  • The Roth IRA brokered tax free distribution has been extended to qualify the physically disabled as well as those that channel the money into buying their first home.

The sterling advantage of the Roth IRA is that your savings can be exposed to high income earning instruments like stocks and bonds and real estate.

In the final analysis what distinguishes the Roth IRA from the traditional IRA?

  • In the traditional IRA you enjoy tax deductions on your contribution and save money upfront. In the Roth IRA the savings are garnered at the back end when you are saved from paying tax on the permissible distributions.
  • Roth IRA shows more flexibility in extending distribution tax benefits to the disabled and for purchasing a first home.
  • Roth IRA permits distributions from the age of 59 ½ whereas the   traditional IRA stipulates that you commence distributions after you attaining the age of 70 1/2.

Is there a valid reason for going for the Roth IRA?

If you feel that you are moving to a significantly higher income slab by the time you reach retirement age, and if you anticipate that taxes are also going to rise proportionately in the future, the Roth IRA emerges a winner as it saves you from paying taxes in your twilight years when you need every penny you save.

Many people are attracted to the security of being in a position to access funds in case of disability or when purchasing a new home without the fear of attracting any penalty.

So, overall the Roth IRA has a timeless appeal to the younger generation that is drawing salaries in a lower tax bracket today, but would love to enjoy more flexibility in investment options and benefits on the taxation front, post retirement.

Kick Starting a Roth IRA investment

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