Explaining the Difference in Roth IRA Rules

Working individuals look for many different financial instruments to help them save for retirement. The Roth IRA, named after Senator William Roth who was its main sponsor through legislation, gives Americans an additional alternative when saving money for their golden years.

As the simplest form of retirement savings, Roth IRAs provide tax-free growth. Normal investment accounts result in double taxation, but a Roth is like a normal Individual Retirement Account in that you are only taxed once. Roth IRA rules indicate that contributions to an account are not tax deductible, however, the distributions and earnings are tax-free, unlike traditional IRAs. These differences are important because the amount you pay in contributions can differ depending on your current tax rate. Investors must carefully weigh their considerations when determining when they are most likely to pay a higher tax rate.

Roth IRA rules do not specify a mandatory age for distribution of earnings. No penalties are incurred during withdrawal. Roth IRAs also allow you to shelter the same amount of money as traditional IRAs, but with one big difference. The dollars you save are already tax-paid. When setting up the account it must be designated as a Roth IRA to receive these benefits. Assets in a Roth account can also be inherited and are also subject to most traditional IRA rules

Some disadvantages are inherent in a Roth IRA, the biggest being that the contributions do not reduce adjusted gross income (AGI). Because you cannot use Roth funds until you retire, you may lose the benefits if you retire before you stop working. Annual contribution limits are affected by filing status and income.

Other possible disadvantages include the U.S. Congress making rule changes that can affect distribution. Roth IRAs are not beneficial for all income levels. To initiate distribution, you must evaluate your own situation.

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