Roth IRA Explained

The Anatomy of a ROTH IRA

Unfortunately the numbers aren’t real impressive when it comes to the number of Americans who have saved well for retirement.  According to a new Employee Benefit Research Institute survey of 1,003 workers age 25 and older and 251 retirees, 49% of workers say they doubt their ability to afford a comfortable retirement and 28% of employees say they don’t feel confident at all about their retirement prospects.  Saving for retirement seems to be a discussion many need to have.  There are different ways to save for retirement, but we are going to focus on one in particular in this post.

A ROTH IRA is one of the most popular retirement vehicles used today.  It has become a favorite among advisors primarily for its tax friendly benefits. Even if you already have an employer sponsored retirement plan, a ROTH IRA can be another excellent tool to complement your existing retirement savings strategy.  Below are the primary positive characteristics of a ROTH:

• Earnings and withdrawals are generally tax-free
• Unlike traditional IRAs, ROTH IRAs don’t require withdrawals during the owner’s lifetime
• Beneficiaries of ROTH IRAs don’t owe income tax on withdrawals and distributions can be stretched out over many years
• They allow owners to take penalty – free qualified distributions at age 591/2, but the first contribution must be at least 5 years before qualified distributions begin
• After 5 years, up to $10,000 of earnings can be withdrawn penalty – free to cover first time home buyer expenses
• You can contribute to a ROTH as long as you would like

There are a couple of limitations that should be pointed out as well:

• There are no tax breaks for contributions to a ROTH IRA
• Unlike traditional IRAs, ROTH IRAs are subject to income – eligibility restrictions.  Click here for a detailed chart of the 2013 income contribution limits.

If you are interested in opening a ROTH IRA, ask your financial advisor or give us a call.  If you would like to do your own research, check out www.mint.com/ira-center.  It is a great place to compare institutions and view minimum deposits, annual fees, etc…