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Definition and Benefit of a Roth IRA

Mar 29, 2008
The Roth IRA is relatively new to the investment world, having only been on option since January 1, 1998. It was created as a result to the Taxpayers Relief Act in 1997 to help Americans better save for their retirement.

For some people (I generally think that in the long run, the Traditional IRA is the better bet for most people due to getting a tax break up front and anticipating lower wages and thereby lower taxes in retirement), the Roth IRA is a better choice for their investment needs than the older Traditional IRA for several reasons. Especially for military personnel who are on active duty in a war time situation, their compensation is tax free, and therefore any contribution they make to their Roth IRA is after tax dollars, even though they were not taxed on their earnings.

A Roth IRA can also be especially beneficial to the entrepreneur that anticipates higher wages in retirement due to past business activities that pay off in retirement as passive income. But for most of the W-2 type earners, the traditional IRA works out better in the long. But without further ado, let's look at some things with regard to Roth IRAs.

The Benefits

1. All qualified contributions are made with after-tax dollars and therefore all monies in the account, including earnings can be withdrawn tax free with certain provisions.

2. Contribution eligibility is not restricted by active participation in an employer's retirement plan.

3. The minimum distribution rules don't apply. Unlike the traditional IRA, you don't have to draw on your Roth IRA at age 70, which means your earnings continue to grow tax-free.

4. You can take certain early distributions without paying any early distribution penalties.

Contributions

1. If you are under the age 50, you can donate as much as $4,000 in 2007, and $5,000 in 2008.

2. If you are over age 50, you can donate as much as $5,000 in 2007, and $6,000 in 2008.

Eligibility

1. You or your spouse must have compensation income equal to the amount you have contributed.

2. Your modified adjusted gross income can't exceed certain limits. For the maximum contribution, the limits are $99,000 for single persons and $156,000 for married individuals filing joint returns. These dollar amounts apply through 2007.

So if you meet these eligibility requirements, and hope to make more money later in life, it may be to your advantage to invest in a Roth IRA vs a Traditional IRA. If possible, you may consider using both options.
About the Author
Get more great finance and investing tips at Jeffry Evans' personal finance blog. What is a Roth IRA? is just one of many great articles you will find at Personal Finance Resources.
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