The New Retirement
About the Roth IRA
The Roth IRA is an appealing investment vehicle for a number of reasons.
Established by the Taxpayer Relief Act of 1997 and named after the bill’s sponsor, the late Delaware senator William V. Roth, Jr., the Roth IRA is an appealing investment vehicle for a number of reasons. For example:
- There are no age limitations on making contributions to a Roth IRA. Money can be invested in an account for as many years as you like.
- There is no mandatory age for making withdrawals from a Roth IRA. Money can continue to grow in an account indefinitely, and can be passed on to your beneficiaries.
- There is no mandatory minimum withdrawal. You can take out as little as you need, and let the rest continue to grow.
- Principal contributions, subject to some minor conditions, can be withdrawn any time without penalty.
- It offers estate-planning advantages. While a traditional IRA is valued at the pre-tax level for estate tax purposes, a Roth IRA can reduce estate taxes for some investors, because tax dollars have already been subtracted.
- Perhaps the most desirable feature of the Roth IRA is that while contributions are taxable, withdrawals are, for the most part, tax free.
With all this going for it, it is not surprising that the Roth IRA has become a very popular way of investing for retirement.
| Traditional IRA | Roth IRA |
|---|---|
| Depending on income level, contributions are tax deductible | Contributions are not tax deductible |
| Withdrawals can begin at age 59½, with a mandatory distribution age of 70½ | No mandatory distribution age |
| Taxes are paid on earnings when withdrawn from the IRA | Withdrawals of earnings and principal are tax free, subject to the tax rules |
| Can purchase a wide variety of investments (for example, stocks, bonds, certificates of deposits, derivatives) | Can purchase a wide variety of investments (for example, stocks, bonds, certificates of deposits, derivatives) |
| Available to everyone without income restrictions (although income may affect deductibility of contributions) | Available to single taxpayers with MAGI of up to $105,000 or married couples with a MAGI of $ $166,000 annually. |
| All funds withdrawn, including from principal, prior to age 59½ are subject to a 10% penalty (excluding certain exceptions). | Contributions to principal can be withdrawn, subject to certain conditions, any time without penalty. |