Roth IRA Misconceptions

by Manshu on November 21, 2006

in Articles

Roth IRA is one of the most favorite retirement plans taken by most American employers. Its tax saving benefits has made it one of the popular plans in United States.

In spite of the popularity, not many people know the intricacies of the plan. Often the general mass has fewer facts and more misconceptions about the plan.

Misconception 1 – Roth IRA is the best IRA for everyone

This assumption can prove to be your biggest pit fall. It probably springs from another misconception that people often have. People think that it’s always monetarily beneficiary to pay tax later than now. The truth is that you can’t escape taxes. The belief that in future taxes will be minimal is nothing more then a figment of imagination that should be strongly thrown out of mind. Any IRA plan, Roth, Simple, Education, SEP or Traditional is good only if it suits your needs. Roth IRA withdrawals are tax free but not contributions. Hence, a Roth IRA account grows at a faster rate compared to a traditional IRA. However, in Traditional IRA the contributions are tax free. Hence, it’s incorrect to say that Roth IRA is the best retirement plan.

Misconception 2 – If you have little savings opt for Roth IRA

This is another misrepresentation of facts. Under Roth IRA, the contributions grow tax free. Hence, irrespective of the fact that whatever be the amount of contribution the tax free growth is for all who have Roth IRA. In fact, if people have higher contributions then they would have higher balance in Roth IRA. Such a class of people can also plan how to pass on the plan benefits to their children.

Misconception 3 – If you are taking Roth IRA, you should hold it for at least 10 years to maximize your gains

This is a popular notion people have in their minds about Roth IRA. There is no scientific proof that Roth IRA is beneficial only for specific term. It all depends on the contribution amount, withdrawals, age of the account owner, etc.

Misconception 4 – Traditional IRA and Roth IRA are nearly the same

Again nothing is same for the same person. The benefits vary as per your needs and use of the plan. Comparing both the schemes requires that you keep all the other parameters such as tax rates, withdrawals, age of account owner, etc. exactly same. This seldom happens in real world. So don’t buy a Traditional IRA just because you’re friend or relative has bought it.

Misconception 5 – Taxes will be low in future

No one of us is expert enough to take a sure prediction at the future. Hence, it’s wise not to make such bold decisions. Such thinking can often prove wrong resulting in huge monetary losses when you need it the most.

For any financial instrument, before taking it, read the policy documents clearly. You don’t have to rush through it especially with your IRA plan. Talk to your family and friends to get a more accurate assessment of your current financial condition and future needs. Take an IRA plan based on facts and not misconceptions other wise your future might hit you hard.

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