What is a Roth IRA

The term, Roth IRA, is very often misinterpreted or ignored. The Individual Retirement Account or Roth IRA was established in 1997, enabling a Roth IRA holder to invest in securities. This was allowed in the form of investments in the stock market, certificates of deposit or mutual funds. The Roth IRA also enabled access to derivatives and notes, and dedicated real estate investments by law. The Internal Revenue Service manages and revises IRA eligibility. The advantages associated with the Roth IRA program are many, but the main one remains in its for income tax structure. The plan allows the investor to be creative by allowing the ownership of investments in non-typical assets or ‘self directed' IRA.

Roth IRA Contribution Limits:

Roth IRA is a flexible return on investment plan that has certain stringent dos and don’ts like the contribution limit. The limit is applicable, regardless of the type of IRA invested in. The Federal Government regularly imposes certain annual contribution limits. It also regulates the maximum dollar investment allowed into an IRA account each year, according to the payroll taxes applicable. The level of inflation dictates Roth IRA contribution limits for various retirement communities.

Some of the main considerations include:

• Deposits don't have to be made at the same time.
• To avail of tax advantages, it is best to make a maximum annual contribution.
• You cannot contribute more than the ‘total allowable amount’ fixed for a fiscal year.
• While the traditional IRAs have tax deductions, the Roth IRAs do not.
• Withdrawals are tax-free, but not without certain pre-calculated stipulations.

Till now, there was a $500 to $1000 investment difference between contributors to the Roth IRA, below and above 50 years of age. For example, in the accounting year 2008, while Roth IRA investors below 50 years of age could invest no more than $5,000; those above the age of 50 years could invest $6,000. Therefore, the total contributions allowed for every fiscal year to all IRAs are limited.

Advantages of Roth IRA:

• Earnings can be withdrawn after the seasoning period and completion of 59 years and six months. The earnings are tax and penalty free. In the case of traditional IRA, all withdrawals are taxed. However, capital gains on stocks or other securities are taxed at the lower long-term capital gain rate.
• The difference in investment that arises due to a shift from traditional IRA can be withdrawn up to the total of the converted amount. This amount is available without penalty and once the seasoning period is applicable to the converted funds.
• Direct contributions can be withdrawn at any time. The amount is not subjected to income tax.
• Contributions can be made to Roth IRA, even if a person has indulged in any other qualified strategy for retirement planning.

The plan is not without some disadvantages.

Disadvantages of Roth IRA:

• A person who invests in traditional IRA instead of Roth IRA avails immediate tax savings, while someone who contributes to Roth IRA does not. The tax savings come from the ‘tax deductible with no income limits’ in the former case, since the investment reduces a taxpayer's adjusted gross income.
• Roth IRA has certain income limits, in contrast to most tax-deductible employer sponsored retirement plans that offer flexibility.
• In Roth IRA, the taxpayer's adjusted gross income is not reduced, while in a traditional IRA, it is.
• A taxpayer who contributes to state income taxes and Roth IRA pays state income taxes on the amount contributed to the Roth IRA in the fiscal year during which the money is earned.

Irrespective of the disadvantages of Roth IRA or the advantages traditional IRA has over the plan, the retirement planning enables a safe investment proposition. It is case sensitive and application and preference would be individual specific. The investment proposition enables the common man to invest in assets, and subsequently, in the IRA program to avail the benefits after retirement.