- Roth IRAs were created in 1996. They are named after William Roth who was a Senator of Delaware. Senator Roth was the chief legislative sponsor for the Roth IRA.
- The main benefit of a Roth IRA lies with its tax structure. Tax free withdrawals come into play when the account has been in existence for at least five years and the owner is 59 1/2 years old. Capital gains, dividends and interest (qualified distributions) are not taxed when the transactions are incurred inside the Roth IRA account. Therefore, earnings are accrued tax-free. Other benefits include no early distribution penalties for early withdrawals either. There is also no minimum distribution at 701/2 years of age as in the traditional IRA. Bottom line, with a Roth IRA, it is easier to withdrawal your money or keep it in the account to continue to earn tax-free returns.
- In a traditional IRA, contributions are tax deductible. While earnings in a Roth IRA are accrued tax-free, contributions are not tax deductible. Additionally, there are upward limitations on the amount of contributions into a Roth IRA.
- Simply having your traditional employer sponsored 401(k) plan may not be enough for retirement. Having a Roth IRA allows the investor to save more and grow more income for retirement since the earnings of the Roth IRA accrue tax-free. Additionally, the Roth IRA can act as a security blanket in cases of emergency since there are no withdrawal penalties after the age of 591/2.
- In 2008, the maximum contribution for Age 49 and below was $5000. For age 50 and above it is $6000. Because of inflation, beginning in 2009, the contribution limits will be increased by $500 increments.
- Contributions to a Roth IRA are not tax deductible. Since you don't get a tax deduction, the Roth IRA does not lower the taxpayer's adjusted gross income. Further, there are maximum contribution limits and the eligibility to contribute phases out once an individual meets a certain income level.
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