An IRA is also known as an Individual Retirement Account. There are many different types of these accounts. One in particular that I would like to discuss is the Roth IRA.
The Roth IRA was implemented in 1997 as a way to encourage the American people to start planning for their retirement in their youth rather than relying solely on their 401k plan or social security. By encouraging individual retirement planning, ultimately they would ease the strain on social security by only using it for those who really needed it. How do they encourage people to use the Roth IRA? What benefits does it provide over the traditional IRA?
First, the contributions to a Roth IRA are non-tax-deductible. This may seem inconvenient in the short term sense, but it actually benefits your retirement fund. This is because you are limited in the amount you are allowed to contribute annually. The 2008 maximum (for households with less than $100k annually) is $5000 for both a traditional IRA and a Roth IRA. Supposing you max out both, the $5000 in the regular IRA is really worth only about $4000 because it will have to be taxed later. But the $5000 in the Roth IRA is true. It was already taxed before contributing it because you didn't deduct it from your income. Cool right?
Another cool thing about the Roth IRA is that funds can be removed after 5 years without penalties. And it will not be taxed since you never deducted it from your income. If you withdraw funds from a traditional IRA before 59 1/2 years of age you are liable for penalties and taxes. And actually the whole IRA will be taxed eventually anyway.
This permission for early withdrawal after the five year seasoning period makes it a great source for an emergency fund that everyone needs. So you can save for retirement while simultaneously putting back funds for emergencies like a new roof, or a new car. The allowances for early withdrawal are relatively lax compared to a traditional IRA.
There are a few very strict withdrawal permissions that allow early withdrawal from a traditional IRA. For instance: You can use up to $10k from the account before 59 1/2 years of age for the purchase of a home. But as I mentioned before the rules are very strict. The buyer must be either the IRA holder, their spouse or a child of the holder, and they must have not owned a home in the previous two years. the other allowances follow suit with the strict circumstantial rules.
The Roth IRA suits me and my circumstances. But each person has their own goals and needs. So to find out which IRA is right for you, talk to a financial consultant about the options. Ask plenty of questions so that you can make an educated decision.
The Roth IRA was implemented in 1997 as a way to encourage the American people to start planning for their retirement in their youth rather than relying solely on their 401k plan or social security. By encouraging individual retirement planning, ultimately they would ease the strain on social security by only using it for those who really needed it. How do they encourage people to use the Roth IRA? What benefits does it provide over the traditional IRA?
First, the contributions to a Roth IRA are non-tax-deductible. This may seem inconvenient in the short term sense, but it actually benefits your retirement fund. This is because you are limited in the amount you are allowed to contribute annually. The 2008 maximum (for households with less than $100k annually) is $5000 for both a traditional IRA and a Roth IRA. Supposing you max out both, the $5000 in the regular IRA is really worth only about $4000 because it will have to be taxed later. But the $5000 in the Roth IRA is true. It was already taxed before contributing it because you didn't deduct it from your income. Cool right?
Another cool thing about the Roth IRA is that funds can be removed after 5 years without penalties. And it will not be taxed since you never deducted it from your income. If you withdraw funds from a traditional IRA before 59 1/2 years of age you are liable for penalties and taxes. And actually the whole IRA will be taxed eventually anyway.
This permission for early withdrawal after the five year seasoning period makes it a great source for an emergency fund that everyone needs. So you can save for retirement while simultaneously putting back funds for emergencies like a new roof, or a new car. The allowances for early withdrawal are relatively lax compared to a traditional IRA.
There are a few very strict withdrawal permissions that allow early withdrawal from a traditional IRA. For instance: You can use up to $10k from the account before 59 1/2 years of age for the purchase of a home. But as I mentioned before the rules are very strict. The buyer must be either the IRA holder, their spouse or a child of the holder, and they must have not owned a home in the previous two years. the other allowances follow suit with the strict circumstantial rules.
The Roth IRA suits me and my circumstances. But each person has their own goals and needs. So to find out which IRA is right for you, talk to a financial consultant about the options. Ask plenty of questions so that you can make an educated decision.
About the Author:
My name is Herbert Castillo and I am planning my retirement at age 21 with a Roth IRA Account I admonish all to plan for their future in their youth because it is the best possible time to do so.
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