Roth IRA

A Roth IRA is an individual retirement account (IRA) in the United States. A Roth IRA may invest in a variety of options such as stocks or mutual funds. As with all IRAs, there are specific elegibility and filing status requirements mandated by the U.S. Internal Revenue Service. A Roth IRA's main advantage is its tax structure. Contributions are made post-tax; earnings and withdrawals are federal income tax free. In contrast, contributions to a traditional IRA are made pre-tax and earnings are tax free, but withdrawals are subject to tax. Another advantage of the Roth IRA is that there are fewer restrictions on withdrawals than with a traditional IRA.

Advantages

While the contributions are not tax deductible, the withdrawals are, including all interest accrued. Once the owner reaches retirement, the money in the fund can be withdrawn tax-free. This offers a significant advantage if the investor is currently in a low tax bracket, but expects to move to a higher tax bracket in the future. For examaple, if the investor is in a 10% tax bracket, an investment of $1000 into a traditional IRA would only offer $100 in tax relief. If the investor retires in a 30% tax bracket, then $300 of every $1000 will be taken away at retirement. While a Roth IRA would offer no taxes incentives at the point of investment, the investors income would be tax-free at retirement. That is, the Roth IRA is designed to benefit investors in low tax brackets.

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There are other various advantages. For example, under certain conditions, up to $10,000 from a Roth IRA may be withdrawn early to pay for a first home.

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Perhaps the greatest advantage of the Roth IRA is its lack of forced distributions based on age. All other tax-deferred retirement plans require withdrawals to begin at age 70½ (more precisely, April 1 of the calendar year after age 70½ is reached), and impose an annual minimum distribution once withdrawals begin at any age beyond 59½. The Roth is completely free of these mandates.

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