Advantages of Roth IRA

Named after Sen. William Roth, the Roth IRA was introduced on January 1, 1998. It is an Individual Retirement Account that enables you to enjoy tax-free growth on your retirement account. Unlike traditional retirement plans, Roth IRA allows you to earn tax-free income and withdraw the money early without penalty. You don’t need to wait until you reach the age of 70½ to get minimum distribution.

The Roth IRA shares certain characteristics with the Deductible IRA. For example, you will only be taxed only once in both deductible and Roth IRA. However, Roth IRA is distinct from the former and provides more significant benefits. In deductible system, you get a tax deduction so you deposit pre-tax dollars. The process is not the same with Roth IRA because you first need to pay the income tax and then making contributions with the post-tax money. Because of this, you don’t need to pay any taxes when you withdraw.

The advantage of Roth IRA over its counterpart is easily apparent. Among the things you will enjoy are:

• Simplicity – there is no need to provide additional reporting to the IRS. Take note that in the deductible IRA, you are required to state the deduction on the 1040 form when making contributions. During withdrawal, you also need to report the whole amount as taxable income in deductible IRA.
• Flexibility – since you are given the chance to meet your tax responsibilities up-front, there are fewer limitations in the future. For instance, you can begin withdrawing your money at an earlier age because there is no set age for withdrawals.
• Protection Against Tax Increases – in case the amount of required taxes increase in the future, you will be protected with this plan. This is because you have completed your tax obligation at an early date. However, this can also work against you if taxes fall.
• Capability to Protect More Actual Money – the Roth IRA has a subtle advantage in the sense that it lets you protect post-tax dollars instead of pre-tax dollars.

Choosing Roth IRA is a personal choice that should be made by each individual. Depending on your situation, you need to decide whether you want to take advantage of deductions or the flexibility and ease afforded by Roth. A lot of people chose get Roth IRA. The bottom line is that the Roth yield a bigger amount compared to the average IRA for the simple reason that it contains after-tax money.