Roth IRA’s have been around since the 1990’s, yet are still misunderstood. What’s the big deal, anyway?
An IRA, or Individual Retirement account, is designed to accept payments or contributions that the individual saves for their retirement. Depending on the style of IRA you choose will determine what taxes will be paid. The main similarities are that your money will sit in the account tax-deferred, and you can contribute a set amount into the account. Other than that, the regular IRA and the Roth IRA vary greatly, according to the Financial Advisor website.. And, this is where the account owner needs to be careful.
A regular IRA allows a maximum allowed contribution of $5,500. Depending on age and circumstances, such as if you’re rolling over an 401(k) account from a former job, you may be able to contribute more. The contribution is made with no taxes taken out, and stays there tax-deferred. There are penalties for withdrawing your funds early. When you reach the age of 70 1/2 years, you must begin withdrawing funds. However, when you withdraw money, state and local income tax will be charged.
A Roth IRA allows the same maximum contribution and variations based on age and circumstances. However, whatever you contribute to the fund, state and local income tax is taken before being placed in the IRA. The funds sit in the IRA, tax-deferred. Another big difference is there is no age where you must start withdrawing; you can let the funds sit there as long as you like, and can begin withdrawing funds when you are 59 1/2 years old. And, when you withdraw funds from a Roth IRA, there is no tax on your withdrawal. However,there is an income restriction for a Roth IRA; single persons must make no more than $129,000 annually, and a couple must make no more that $191,00 annually.
Possibly the most important reason to choose a Roth IRA is those withdrawals. With a Roth IRA, withdrawals are not taxed, so they are not seen as income. However, with a regular IRA, the withdrawal is seen as taxable income. If you withdraw a large enough sum, you could be sending yourself to a higher tax bracket, and higher taxes, according to the Wall St. Journal. So, even though it may seem that you would need to be somewhat clairvoyant, it would still be a good idea to consult a financial planner to find your best fit.