Though the Roth IRA is only about ten years old, its popularity among retirement investors is quickly growing. There are many benefits to this IRA program and understanding why it is a superior product for your financial future may make the difference between a retirement of financial comfort or a daily struggle to make ends meet.
What is a Roth IRA?
A Roth IRA allows those taxpayers that are qualified to make contributions which are non deductible after taxes. Contributions you make to the Roth IRA are completely tax free and the earnings they produce are not subject to taxation when they are taken out as a distribution deemed qualified.
The Roth IRA offers the investor financial and estate planning above and beyond retirement benefits that are not typically offered with conventional IRAs. With a Roth IRA, there is no limit to the age for which you can make contributions. In a typical IRA, once a person has reached the age of 70.5, they are no longer able to contribute to their fund. Not so with a Roth IRA.
Distributions deemed qualified are also tax free with a Roth IRA. A qualified distribution is one that is made when the contributions are a minimum of five years old. The distribution can be taken by the holder when they reach the age of 59.5, have died or are disabled. You may also use the Roth IRA for purchasing your first home without penalties. Conventional IRAs are often taxable when used for this purpose.
Traditional IRAs state that the holder must begin to take their distributions once they reach age 70.5, whereas with a Roth IRA, contributors can continue to add to their fund and continue accumulating tax free status for the rest of their life.
The Roth IRA Lifetime Distribution
Because the Roth IRA has a tax treatment that is preferable to traditional IRAs, the taxpayer that decides to utilize lifetime distribution will benefit greatly. Your earnings are tax deferred as are traditional IRAs, but to your greater benefit because there is no taxation imposed on the distribution of a Roth IRA.
The Five Year Wait
The sooner you begin to contribute to a Roth IRA fund, the less tax you will pay after the five year waiting period. You will make more on your returns as well. Setting up a Roth IRA for children and grandchildren will have them on the road to financial success long before they begin to participate in the adult world. Encouraging them to contribute to a Roth IRA fund when they get their first jobs will also teach them financial responsibility at a young age.
When you invest in an Roth IRA fund for your child or grandchild, the five year waiting period for tax free benefits will come sooner rather than later for them and may give them the funds to attend college or make their first home purchase with far more financial power behind them. Roth IRAs are the wave of the future so go out and find out how you can begin reaping the financial rewards of this superior investment product.