The Roth IRA Advantages Are Many

However there are also some Roth IRA limitations. This article will take a look at the many Roth IRA advantages according to the current laws governing individual retirement accounts and the tax free growth that they allow. Because of recent changes in the make up of the government, there are many who believe that the days of the individual retirement account are limited. Are can hear you raising a concern as I write this. But aren’t IRAs a good vehicle for retirement planning. Yes, I would argue, the IRA has been a tremendous vehicle to help individual Americans set aside money for their future and their retirement. The issue comes from the fact that in an individual retirement account, your money grows tax free.

Because of this fact, naturally, you do not pay taxes on it and therefore the government does not get a piece of it. Because of the fact that the government wants this money to provide services to citizens (or in some cases because the government doesn’t think that citizens have done a good job investing their money and therefore they need to save you from yourself by not giving you the opportunity to invest it yourself). Therefore some believe that it is only a matter of time before the Roth IRA advantages become null and void once the government decides that it wants to get a piece of the pie. I need to mention this because you need to stay abreast of the laws governing IRAs and be prepared for them to change significantly in the future. At the moment, however we can speak of Roth IRA advantages under the current law because until the law changes there are still many advantages to a Roth IRA both in comparison to a traditional IRA and also in comparison to a non-retirement brokerage account.

So what are the Roth IRA advantages? Before we get to those advantages let me give you a little background information on the Roth IRA. Currently, the government encourages private citizens to save money to plan for their retirement by establishing individual retirement accounts. In an IRA your money is allowed to grow tax free over many years or even decades. There are two types of IRAs. There is the Traditional IRA and the Roth IRA. I have written a piece on the debate between the Roth IRA vs Traditional IRA. and as I am not a tax professional it is up to you to consult with a tax expert before deciding with IRA is right for you. However, there are several advantages to the Roth IRA and let’s take a look at them now.

The major Roth IRA advantage is that withdrawals are tax free. What this means is that you will not receive a tax deduction when you deposit a contribution into your Roth IRA. You will pay taxes on that income when it is deposited into your account. However, when it is time to withdraw the money (meaning you are into your retirement years) you will not have to pay any taxes on the distributions (which are the withdrawals of your money). This is the biggest advantage of the Roth IRA over the traditional IRA. With a traditional IRA you will be able to deduct your contribution from your taxes when you make it, however when you reach retirement age and begin to withdraw the money, then you will have to pay taxes on it at the level of your income. This can be a problem is you reside in a high tax bracket into your retirement years as your distributions will be taxed as ordinary income not as capital gains. Therefore the fact that the distributions of the Roth IRA are not taxed at all give the Roth the advantage over the Traditional IRA.

Another one of the Roth IRA advantages is that your money grows tax free. Now, in the case of a Traditional IRA this is true as well. But in this case the Roth IRA advantage is over a brokerage account that is not a retirement account. In a Roth IRA if you achieve a capital gain on a transaction. You will not have to pay taxes on that capital gain. You can re-invest the entire amount of the money into another stock or investment vehicle and let your gains continue to compound. It is really, of all the Roth IRA advantages, the number advantage of the Roth IRA over the brokerage account.

Because your distributions in the Roth IRA are tax free, it is uncertain how long this will remain the present system. The current government in Washington is eager to introduce new government services and will need money in order to finance these initiatives. As a result many feel that the Roth IRA advantages will become a thing of the past as the IRA system is reformed into a guaranteed government savings accounts or some other thing. Regardless, it would appear that government will not be able to keep their hands off this retirement money for the next twenty or thirty years so expect the Roth IRA advantages to be mitigated by new law or otherwise eliminated in order to increase government tax revenue. I remain hopeful that the IRA system can be saved however it does not appear likely that it will remain intact until I reach retirement. This can be disconcerting since I believe that my money will not reach me tax free like I have been promised. If you believe that the government will eliminate the Roth IRA advantages you need to keep that in mind when deciding how to proceed.

Remember it is important to always confront a tax professional when making these decisions.

Let’s look at the Roth IRA vs Traditional IRA debate.

First, what is the difference between a Roth IRA and a Traditional IRA. There are several minor differences between the two accounts however there is really only one difference that we as consumers need to keep in mind. This is the main difference between Roth IRAs and Traditional IRAs. That difference is as follows: Deposits made into a Roth IRA are taxed upfront while in a Traditional IRA you pay the taxes on your contribution when you withdraw the money in your retirement. In both the Roth IRA and the Traditional IRA your money is allowed to grow over time untaxed. Thus, IRA’s have become a popular vehicle for retirement planning as removed from taxation your money can grow at a profoundly accelerated rate. And for this reason, because the government is not getting a cut of your money (and a substantial cut at that) many in the government want to take a serious piece of your individual retirement account or abolish the individual retirement account all together.

But, back to our discussion of the Roth IRA vs. Traditional IRA. Realize that with either IRA the growth on your money will be tax free. The major difference between Roth IRA and traditional is that in the Roth you pay taxes on your contribution up front while with the Traditional IRA you will be able to claim a tax deduction for your contribution. Therefore when you take distributions from the Traditional IRA your distributions will be taxed. We will get back to this in a moment. Remember that this is the system right now and after the recent changes in the make up of the executive and legislative systems in government there are rumblings that this will change in which case you will no longer enjoy the tax benefits of the current retirement account system. However there are a couple of more elements in the Roth IRA vs Traditional IRA debate that we should look at. One key difference is in how age is treated with a Roth IRA vs a Traditional IRA. At the moment, in a traditional IRA you can only make contributions into your account until you reach the age of 70.5 years. This is simply not the case with a Roth IRA. In the Roth IRA there is no deadline or sunset regarding age and contribution caps. You can continue to fund your Roth IRA until you turn one hundred years old if you so desire. Many observers also feel that the freedoms provided by the Roth IRA make it a likely target to be eliminated by the federal government sometime soon because the government doesn’t see why you would want to fund your IRA at some advanced age and it doesn’t want to allow you to continue you to do it. Again, we will see where the age restrictions and the IRA end up in time but for now this is a key difference between the IRA and the Roth IRA.

Another difference between the Roth IRA and the Traditional IRA is in the distributions with are essentially withdrawals of your money from your account. With the Traditional IRA you are required to take distributions from your account when you hit a minimum age of 71.5 years old. At this point distributions are required by law whether or not you want to take them or not. With the Roth IRA this is not the case. The Roth IRA allows you to leave your money untouched until you need to withdraw it regardless of your age.

At this point in the Roth IRA vs. Traditional IRA debate you might be wondering if the Roth IRA is the better choice? I would caution you read on and finish the article (and also seek professional advice) before you make your final decision about which is better.

Another distinction that needs to be drawn between Roth IRAs and Traditional IRAs has to do with taxes. It is essential that you realize that the distributions drawn from a traditional IRA are taxed in the same fashion as income and not, as some of you might have believed, as capital gains. If you are drawing other income from sources like a job or something else that you are making money on, you must realize that your distributions from your Traditional IRA will be added to your current income and as a result your total income could get bumped up to a higher tax bracket. So, their can be that tax disadvantage of the traditional IRA. Since the Roth IRA distributions are not taxed then this is not an issue with the Roth IRA.

At this point in the Roth IRA vs Traditional IRA debate some might say that the Roth IRA looks like a better choice. I can not say with any certainty if this is the case, and I recommend that you consult a tax professional (which I am not) in order to decide how to proceed. As a result of this debate, some of you may be wondering why the IRA system will be abolished. The issue comes down to money. The government believes that they are entitled to a percentage of your retirement account in order to operate the government and provide services to citizens. As a result of this few believe that the government will be able to resist the urge to disturb the current IRA system in order to begin taxing the money. We will have to see where this debate over IRAs will take us.

Regardless, I hope you have found this illustration of the Roth IRA vs Traditional IRA helpful and informative.