About Roth IRAs
Why would you choose a Roth Ira instead of a regular Ira? The most valuable advantage to a Roth Ira is the fact that you contribute to a Roth Ira with 'earned income' that you have already paid taxes on. Now this might not be something that you would call an advantage. After all, we're all trying to reduce our taxes as much as possible. Right?
OK but think about this. Most of us expect that as we age, our income will increase. If we are earning $30,000 per year now, in 30 years, we could be earning $80,000 per year. Would you rather pay taxes on your Ira contribution at a $30,000 tax rate or an $80,000 tax rate. A regular Ira is tax deductible now, but you will have to pay the taxes when you draw it out later. Probably at a higher tax rate. So investing in Roth Iras seems to be the better choice, but there are limits on 'earned income' associated with the Roth Ira. Up to $95,000 in earned income is the limit for a single filer to be able to make a full contribution for the year to a Roth Ira. From $95,000 to $110,000 the single filer will be able to make a partial contribution. $110,000 is the cut off point. It is important to mention that you can withdraw money from a Roth Ira at any time, but there is a 5 year rule. This rule says you must own the Roth Ira for 5 years. If you withdraw money before the 5 years are up, you will pay income tax on any earnings and will be charged a 10% early withdrawal fee. There is one other advantage I would like to mention here. Unlike all other tax deferred retirement plans that require you to begin withdrawing by April 1st of the year after you reach 70.5 years of age, the Roth Ira has no such restrictions. |