Retiring with a Roth IRA

In 1997, the government reduced many federal taxes as part of the Taxpayer Relief act of 1997. One of the proponents of this act was a Delaware Senator named William Roth. He introduced the idea for the Roth Individual Retirement Account (IRA). The main benefits to the Roth IRA are the revised tax rules that let the Roth IRA be more flexible in some ways than the traditional IRA.

Planning for your retirement is an important financial step. And there are many different retirement accounts that can help you start to save for your future. There are 401(k) accounts, traditional IRA accounts, Roth IRA accounts and more. If you’ve decided to start a Roth IRA, this can be an easy process. Many financial institutions such as banks and credit unions offer various types of IRA accounts including Roth IRAs. You can also contact your personal broker or a brokerage firm to help you set up the Roth IRA account that best fits your needs.

There are many advantages to starting a Roth IRA account. After you’ve had a Roth IRA account for five years, you can make withdraws from the account without being penalized – though the funds may still be taxable as income. With a traditional IRA account, you have to be over the age of 59 ½ to be able to withdraw money without penalties. If the withdrawal is considered qualified (for example, if you’re buying a house) then it may be tax exempt.

With a Roth IRA there is not age requirement for making withdrawals. Meaning not only can you be younger than 59 ½ to make them, but you don’t have to start making them once you’ve turned 70 ½. With a traditional IRA, the government regulates that you must start making withdrawals once you reach 70 ½. Though with a Roth IRA, once you’ve turned 59 ½, the withdrawals are not taxed as income.

While there are several advantages to having a Roth IRA, there are some disadvantages too. For example, contributions to a Roth IRA are not tax deductible. This means that if you contribute from your paycheck to a Roth IRA, it will not be on a pre-tax basis. Tax payers are usually in a higher tax bracket when they contribute money to a Roth IRA than when they are retired and start to withdraw money from it. In some cases, this means you may pay higher taxes. Because with a traditional IRA you pay taxes when you withdraw the money – if you are in a lower tax bracket, you’ll pay fewer tax dollars.

The yearly contribution that can be made to a Roth IRA is similar to a traditional IRA. As of 2008, that amount is $5,000. But the dollar may be increased in future years. There are also other eligibility requirements. The more money you and your spouse make in a year, the less you may be able to contribute to a Roth IRA.

Because there are many different types of retirement accounts such as a 401(k), traditional IRA, Roth IRA, it’s best discuss with a financial advisor which may be suited for you and your family’s needs. You may even be able to convert your current IRA account into a different type of IRA account if you find that it suits your needs better. For example, you may be able to convert you traditional IRA account to a Roth IRA account if you meet certain eligibility requirements.