Basics of Roth IRA

by Manshu on November 16, 2006

in Articles

Basics of Roth IRA

The Individual Retirement Arrangement (IRA) or what is generally known as the Individual Retirement Account is the personal retirement savings plan of an individual, with taxable income that includes salaries, wages, tips, fees, bonuses, commissions, taxable alimony and separate maintenance payments. The Roth IRA is also an Individual Retirement Account which provides growth without you, the account holder, having to pay any taxes.

The Roth IRA account provides you with better tax facilities which are simple and effective. This is because all your contributions into this account have already been taxed. It also means that you have to pay all your taxes before making any contribution to Roth IRA. Once this is done and the money is invested in your Roth IRA account you have not to pay any taxes on any withdrawals and there is no need for these withdrawals to be reported at any time. Your gross adjusted income (AGI) during retirement thus remains unaffected. However, the only drawback of this account is that you might have to pay a higher tax, as it is paid during your working period rather than after your retirement.

This account can be opened through any provider who provides normal investment accounts including stockbrokers and mutual funds. In case you meet the criteria in a given year for opening a Roth IRA account, you will have to do so by the following April 15. The eligibility criteria are of course based on your age but your income level and filing status. There is no compulsory requirement for distribution.

It is an account created basically for working people so that they can save for their retirement. Here, the contributions have to be made from salary and not from any other source of income. Therefore lazy kids and wealthy people generally do not make the grade. However, the limits and rules change every year.

There are some withdrawals in Roth IRA such as:

a) The withdrawals made to your beneficiary or to your estate agent after your death

b) The one made on or after you become 59 1/2 years old

c) When according to the IRS code, you become disabled

d) if used to pay qualified first time home buyer expense.

If the withdrawals are made for any one of the above mentioned purposed and within the five year tax period the distribution (that is the withdrawals made from additional contributions, earnings or conversions) will not be qualified for tax exemption. The qualified withdrawals are those which are previously taxed before the contribution stage and are made after the five year tax period. The tax year will begin on the day when the tax payer first contributed to the Roth IRA.

The tax breaks in Roth IRA is different in as much as in Roth IRA the savings are tax exempt while in others the tax is deferred and has to be paid at a later date. The difference is that while the traditional IRA allows you to increase your wealth like Roth IRA, it also makes you pay for the profits at a later date which is what the Roth IRA does not do. It is better to pay the government while working than after your retirement.

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