Senior Retirement Tips :: What is a Roth IRA?
What is a Roth IRA?: Understanding What Is The Benefit of a Roth IRA
The Roth IRA has been around since 1998, and yet still, many people are asking the question “what is a Roth IRA?” To find out how a Roth IRA works, its advantages and disadvantages and whether it's right for you, keep reading.
What is a Roth IRA?
Basically, a traditional IRA gives employees a tax deduction for their retirement investments. The proceeds of those investments are then taxed once the employee retires and starts to withdraw.
Essentially, a Roth IRA, a new type of retirement account, offers employees the ability to withdraw their proceeds tax-free once they hit retirement. But, they get no tax breaks or deductions for contributing the money in the first place.
Is a Roth IRA right for you?
Every type of retirement saving plan is designed for a particular type of individual and financial situation and though the Roth IRA can work wonders for some, it's not always the right solution for everyone.
Before you opt for a Roth IRA, look first into a 401(k). One of the best benefits of a 401(k) is if your employer will match your contributions. If so, that's free and tax free (at the time of contribution) money that you could be passing up by opting for a Roth IRA. You should at least contribute up to the amount that your employer will match.
However, if you suspect that your tax rate will be higher when you retire than the Roth IRA is likely right for you. For example, if your tax rate currently hovers at 25%, but you suspect it could be as high as 40% by the time you retire, then it's smarter to opt for the tax-free income later rather than sooner.
To estimate your future tax rate, look at your current position – are you at your peak earning potential or are you just starting out in your career and expecting to earn more in the future? If you fall into the latter, then a Roth IRA is for you. However, if you're currently earning at your maximum and expect your tax rate to fall at retirement, then you're better off sticking with a traditional 401(k) plan.
Who can qualify?
For a traditional IRA, high earners with an income of over $60,000 can't qualify or make contributions. However, the AGI limitations on a Roth IRA are an incredible $160,000 – making it the better choice for high-income earners.
In the hopes of helping you understand what is a Roth IRA, you should now have a clear grasp of the benefits and drawbacks or this retirement savings plan and whether it's a good choice for you.
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SeniorRetireTips.com :: What is a Roth IRA?