');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');} ');}

Roth IRA Basics

What is a Roth IRA?
Its an individual retirement account named after William Roth Jr of Delaware, the chief sponsor of the legislation that created it. It is a relatively new entity, it wasn’t established until 1998. A Roth IRA, unlike the 401(k), is not something that is employer sponsored, it is an extra retirement account the government will let you create (if you make under $99,0000 per year). Just like the 401(k) you must be 59.5 to withdraw your earnings without penalty.

What are the advantages of a Roth IRA?
-Because you contribute money after the government has already taxed it, withdrawls of contributions are tax free. Even better, the earnings grow tax free. In other words, if taxes are higher in the future, your Roth IRA doesn’t care. At retirement you still get to withdraw your money without paying higher taxes on it.
-It is very flexible in how it can be managed. In other words, you can have a big mix of investments in it.
-Because you have already paid income tax on it, you can pull out your contributions (not your earnings) at any time. This is a huge advantage over the 401(k).
-Most people will be in higher tax brackets as they get older, meaning that you will pay less on your contributions now than you will when you retire.

What are some disadvantages?
-You still have to be 59.5 to withdraw earnings without heavy penalties.
-It is not tax deductible
-There is always the risk that congress will decide to tax earnings on Roth IRAs between now and your retirement.

What is this about restrictions on how much I make?
You can only contribute to a Roth IRA if you make less than $99,000.00 per year.

What is this about restrictions on how much I can put in?
As of right now you can only put in $4000.00 a year if you are under the age of 50, and $5000.00 if you are over the age of 50.

Should I max out my Roth IRA or my 401(k)?
First max out your employer match of 401(k) and then max your Roth IRA and then back to the 401(k) if you can afford it. This is an effective way of hedging your bets on paying taxes now versus in the future. Roth is taxed now, 401(k) in the future.

Leave a Reply