Understanding the Roth IRA

Are you wondering if a Roth IRA is a good choice for you? In order to decide whether or not a Roth IRA is right for you, it's important for you to understand how Roth IRA plans differ from traditional IRA accounts? The primary difference between these two types of IRA accounts lies with taxation. While a traditional IRA is a tax deferred account, funds go into a Roth IRA after tax.

When you invest money in a traditional IRA, you enjoy the current day benefit of putting in the money pre-tax. When you withdraw funds from the account upon retirement, you are responsible for paying income tax on the original funds invested as well as capital gains taxes on the interest earned on the money during the period of time it was invested.

With a Roth IRA, money goes into the account post tax. That means you pay income taxes on the money in the year it is earned. Why would you want to do that when you can invest money in a traditional IRA on a tax deferred basis? There is a very good reason. With a Roth IRA, when you withdraw money from the account after retirement, you don’t have to pay taxes on any of the money. You've already paid income taxes on the initial funds invested, and there is no tax obligation on the interest earned on the account during the time the money was invested.

As an added benefit, with Roth IRAs there is no time limit on how long the money can continue to accrue interest. With a traditional IRA, once the account owner reaches a certain age, he or she is required to take minimum distributions from the account. This restriction does not exist with Roth IRAs. You are allowed to keep your investment intact, earning truly tax free interest, for as long as you choose to do so. Further, when determining income for social security purposes, Roth IRAs do not factor into the determination of whether or not a retiree's social security benefits are taxable.

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