Roth Ira

In the last couple years, President Bush and Congress have made yet more changes to the complexity of the federal tax code, and some have resulted in advantages to the Roth IRA. All of it in an attempt to simplify things.

Their efforts have resulted in annual alterations to the approximately 46,000 pages that now comprise the complete volume of federal tax rules and regulations. As hard as it may be to believe it, one of the recent changes actually resulted in something good for the poor taxpayers. The new device is called the Roth Individual Retirement Account (IRA), and it was part of the Taxpayer Relief Act of 1997. It got its name from Senate Finance Committee Chairman William V. Roth. He's been an advocate of retirement savings accounts like IRA's for a very long time.

The standard IRA has been around in various forms since the '70's. Traditional IRA's, with certain exceptions, provide an income tax deduction when you make contributions to your account. They also allow for tax-deferred growth for the account as long as the money is not withdrawn until the recipient reaches age 70 years six months.

So, what are the advantages of a Roth IRA? If you were to withdraw money from an ordinary IRA before age 59 and six months, you would pay ordinary income tax on the withdrawal as well as a ten percent penalty tax.

In the case of a Roth IRA, the tax and penalty don't apply if the account has been established for at least five years and the earnings are withdrawn for higher education, a first-time home purchase, or as a result of disability. Those features are especially valuable for younger Roth owners.

In the case of older workers, one of the real benefits is the lack of a required minimum distribution. One thing that really irritates older workers/retirees is the fact that, after reaching age 70 and six months, they have to withdraw money from a traditional IRA every year, and pay income tax on the money withdrawn.

There is no such requirement with a Roth IRA. Also, a Roth account can be used to fund an IRA after age 70 and six months, when contributing to a traditional IRA is not allowed. This makes it an excellent place to put whatever money is left after paying taxes on the mandatory (traditional) IRA distribution. So, it's easy to see that there are definite advantages to having a Roth IRA as opposed to a standard one.