Planning For Retirement – Part 3 … ROTH IRA’s

The ROTH IRA is perhaps one of the best tax advantaged retirement plans available to the individual taxpayer today.  Created in 1997 by the Taxpayer Relief Act, the ROTH IRA is similar to a traditional IRA in that it allows individuals to save for retirement in a tax sheltered environment; i.e., the earnings and growth within the account is not taxed.  However, there are some significant differences.

• Contributions are not tax deductible.  All money put into a ROTH IRA is “after tax” money.  You’ve already paid income taxes on it.  While this may initially sound like a disadvantage, it proves to be a real advantage when it comes time to withdraw funds from the account.
• Withdrawals from the ROTH IRA after age 59¹/₂ are tax free.  That is huge!  Where all withdrawals from a traditional IRA are subject to federal income tax, both the principal and the growth are untouched by the tax man when they are withdrawn from the ROTH IRA.
• There are no minimum annual withdrawals required from a ROTH IRA after age 70¹/₂.  For someone who does not necessarily “need” the money from their retirement fund and who wants to leave it as a legacy to a family member, this allows the money to continue growing in the tax sheltered environment.
• Where the traditional IRA prohibits any additional contributions after age 70¹/₂, a person can continue to contribute money into his or her ROTH IRA so long as he or she has income.
• Earnings can be withdrawn without federal tax penalties when the funds will be used for:
  • expenses for a post-secondary education (i.e., college or accredited trade or technical school
  • health insurance after a long period of unemployment
  • periodic payments such as credit card debt
  • catastrophic medical expenses
  • payment on a levy
  • If the money has been invested for five taxable years, earnings can be withdrawn tax-free if the individual:
    • has reached the age of 59¹/₂
    • has become disabled
    • is using the money for a first-time home purchase
    • has died

One final note regarding withdrawals from a ROTH IRA is in order.  If the ROTH IRA owner dies and the spouse is the beneficiary, the spouse has the right to roll the money into his or her own ROTH IRA or postpone taking payments based on projected life expectancy until the owner would have been 70¹/₂.

The ROTH IRA has the same contribution limits as the traditional IRA discussed in Part 2, including the availability of the “catch-up contributions” if the person is over the age of 50.

Because the ROTH IRA empowers us to accumulate money in a tax-sheltered environment and permits tax-free withdrawals in retirement, this may well be one of the very best retirement planning options available to U.S. taxpayers today.  If you haven’t looked into this great plan, you might want to do so today!

NEXT UP … 401(k)’s