Roth Ira

The Roth IRA (Individual Retirement Account) is a retirement account that is allowed by the IRS and is significantly differently from other IRA accounts. Here we will discuss those differences and explain why you should participate in an employer sponsored Roth IRA account if one is available.

What are the differences between a traditional IRA and a Roth IRA? Well, the first difference, and the largest difference is that unlike the Traditional IRA, the Roth IRA is NOT tax deductible.

What does that mean? With a traditional IRA, the monies that you contribute to the account lower you taxable income. So if you made $40,000 a year and contributed $8,000 per year to your traditional IRA account, your taxable income would only be $32,000.

However, with a Roth IRA that doesn't happen. When you contribute that $8,000 of your money to the Roth IRA, your taxable income is still $40,000. Sure, you're thinking, "What is the benefit of putting my retirement money into a Roth IRA if there is no benefit?" There is a benefit…keep reading.

What is the benefit of having a Roth IRA? If you expect your tax bracket to be higher after retirement, then before, you will want to contribute to your Roth IRA before a traditional one. That is because of its advantage. The contributions to a Roth IRA are not taxable upon distribution. That means that you pay taxes on the money when you put it in…and that's it. Simply put, you get taxed on the front end with a Roth IRA and on the back end with a Traditional IRA.

What are the disadvantages of the Roth IRA? As discussed, the Roth IRA is not tax deductible. This means that cost of initial investment into a Traditional IRA account is a substantially lower than that of the Roth.

Another disadvantage is that Congress may sometime, soon, decide to tax the earnings of a Roth IRA. That means that while your money is making money (may be soon to be classed income) the IRS will be taking their share.

The tax benefit (realized after retirement) might not be gained. If retirement age is not reached by the account holder they will never know the benefit of contributing their money to a Roth IRA. They will have been taxed on the front end, but they will not have ever reached the back end.

The last disadvantage is the hefty penalties accessed if an early withdrawal is taken. If you are younger than 59 and a half years old, then you will taxed on the withdrawal at your marginal tax rate and a 10% penalty will be accessed. That is sometimes a high chunk of change.

But for all the disadvantages, one cannot over look the advantages. If you truly look at your financial position and can forecast how much money will be available to you in future, you can determine if your tax bracket will be higher than it currently is. If you think that your tax bracket will move up after retirement, you should be participating in your employer Roth IRA.