A Roth IRA

The Roth IRA first came onto the scene in January of 1998. Named after the late Senator William V. Roth, Jr. the Roth IRA was created as a result of the Taxpayer Relief Act of 1997.

What is a Roth IRA

With a Roth IRA, contributions are made on an after tax basis. Unlike a Traditional IRA there are no tax benefits when you make these contributions. A Roth IRA shows its benefits when you begin to withdraw from it. Despite the fact that they provide no deductions for contributions, if you meet a certain set of requirements, all the earnings from your Roth IRA are tax free when you withdraw them.

Is a Roth IRA Right for You?

The major benefit of the Roth IRA is clear. It offers you the unique ability to escape taxation on your invested earnings. Of course, the "cost" of this is the fact that you do not get deductions when you contribute to your Roth IRA.

Determining if a Roth IRA is a good option for you depends upon your personal situation. First you have to answer a few basic questions like - how long before you begin withdrawing money from your IRA? When you do begin taking withdrawals what will your tax bracket be? What earnings will you be receiving before taking withdrawals?

For most individuals a Roth IRA is actually a good idea thanks to the tax benefits at the time of withdrawal. There are however two additional Roth IRA advantages. First of all, there are no minimum distributions required so you don't have to begin withdrawal at age 70 ½ if you don't need to. In addition, you can take certain early distributions without penalty.

Roth IRA Distributions

The distributions you take from a Roth IRA are different from those of a Traditional IRA due to their tax-free status. First, Roth IRA distributions are withdrawn from your regular contributions, then from your conversion contributions if you have any and lastly from earnings made from your original contributions. Withdrawals of this kind are tax-free if you are over age 59 ½ and your Roth IRA was established over five years prior to these withdrawals. If not, there are early withdrawal penalties.

* This information is not intended as tax or legal advice. Please consult with your tax advisor or attorney regarding your individual situation.

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