Roth IRA: Overview

by Anna Glendenning | More from this Blogger

05 Jan 2007 01:33 AM

In 1997 the Taxpayer Relief Act was passed and The Roth Individual Retirement Account (Roth IRA) was created and named in honor of the late Senator William V. Roth, Jr. Roth IRAs are Individual Retirement Accounts opened and managed through a stockbroker, mutual fund, or other provider of investment accounts.

A Roth IRA offers an opportunity to invest earnings and avoid taxation. The disadvantage is that taxpayers cannot take a deduction for contributions to the Roth IRA. Some of the Key Points with a Roth IRA include:

• A tax structure unlike other IRAs: contributions are post-tax, but growth is tax-free; once the money is paid in, investors pay no more taxes.
• There are restrictions about whether a person can contribute and how much to a Roth IRA, just as there are restrictions for all IRA's. Based on income level and filing status when eligible in a given year taxpayers have until the following April 15 to make Roth IRA contributions.
• In some cases investors may be eligible to make a regular contribution to a Roth IRA even if they participate in an employer maintained retirement plan.
• Roth IRAs are more flexible, because taxes are paid up front, and there are no minimum distribution requirements.
• When investors are able to live on other resources after retirement, they don't have to draw on the Roth IRA at age 70½. Meaning earnings continue to grow tax-free.
• There is an opportunity to take certain early distributions without paying the early distribution penalties.
• Withdrawals are not reportable income; they won't affect adjusted gross income during retirement.
• Distributions from Roth IRAs are tax-free until all of the regular contributions are withdrawn.
• After regular contributions are withdrawn special rules apply when to the withdrawal of the conversion contributions. Once all contributions including the regular and conversion, are withdrawn any subsequent withdrawals come from earnings.
• The withdrawals are tax-free for investors over the age of 59½ if at least five years have expired since the Roth IRA was established. Otherwise, with few exceptions they're taxable and may be subject to early withdrawal penalties.

Roth IRAs may be one of the best retirement savings plans for some people, but every individual investor has a personal and unique situation. If you are considering options for retirement planning it's important to educate yourself and ask questions, of your financial advisers, agents and others involved. Retirement planning is a complex matter and the more involvement we take in our own planning, the better we will understand the implications we face as we age!

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investment, IRA, Roth IRA