Advantages of The Roth IRA

Most people have some type of retirement plan that they are placing some of their income into each year. An Individual Retirement Account is also known as an IRA and it is basically a special type of savings account .Instead of the money in the account being used for any purpose these funds are only used for retirement. Money that is placed in an IRA is not subjected to the same type of taxation as normal income. This tax savings is one more reason why having an IRA is such an attractive option.

Each year a person is allowed to make IRA contributions. There are specific guidelines that govern how much money can be placed into these accounts. You should be familiar with the way that IRA accounts work.

While there are many different types of Individual Retirement accounts there are two that are the most common. These are the regular, traditional IRA and the other is the Roth IRA.

With a standard IRA you are allowed to contribute up to $4000 into the account each year. However, those who are aged 50 and older can contribute a bit more. These contribution amounts are tax deductible. Although the money you put into an IRA is not subject to income tax when you make the contribution, if you withdraw any of the money before you retire it becomes taxable income immediately. Not only is the money taxed at the standard rate you are also assessed penalties of 10%.

* The only exceptions to the 10% penalty occur when the money withdrawn is being used to pay for college or to buy a home.

The money that people put in a Roth IRA does not have the advantage of being tax-deductible contributions. Still a Roth IRA is more flexible about withdrawals. You can access your money from these accounts at any time without being assessed a 10% penalty or any additional income taxation.

Any interest that your Roth IRA has earned will be subject to taxes and penalties if you withdraw money from the account in the first 5 years. After this time limit you can make withdrawals from your Roth IRA to use for the purchase of a new home or to cover any college related expenses. These monies will not be penalized.

If your annual income exceeds $105,000 per year then you are no longer eligible to contribute the maximum amount into an IRA account. Those individuals with incomes that exceed $120K annually can not make any IRA contributions.

A Roth IRA has some distinct advantages to offer and it is a retirement fund option that should be given careful consideration. You can even elect to roll over the amount in a standard IRA and move it into a Roth IRA. This can work to your benefit because it will save you money if you should need to withdraw your funds at an earlier date than normal retirement age.