Roth IRA

It is probably been a few years since you’ve thought seriously about an Individual Retirement Account, but there are four reasons to look at IRAs again.

1) The Roth IRA may be the best ever. It lets you contribute money each year- and you never pay any federal income taxes. You don’t get an immediate tax deduction as with the Traditional IRA, but if you meet the eligibility requirements, what you get can be even more valuable: tax-free compounding and, after five years, qualified distributions can be withdrawn tax-free after age 59 1/2. In a Traditional IRA, you get the compounding but pay taxes when you take the money out.

2) Congress has raised the eligibility limits for a Traditional IRA tax deduction.

3) You can contribute money to a non-working spouse’s IRA even if the other spouse is an active participant in an employer retirement plan.

4) You can convert a Traditional IRA or, with little extra work, a company retirement plan distribution to a Roth IRA and benefit from the new tax-free status. You pay income taxes on the amount you convert, but over time the subsequent tax-free growth may more than compensate.

Most people will need help deciding which IRA is best for them. 

This nondeductible IRA has been heralded as a tremendous planning tool.

 Here are five major features of the Roth IRA to consider:

1. Individuals can contribute up to annually to a retirement account from which all distributions will be tax-free

   Although contributions to a Roth IRA are not tax-deductible, earnings will grow free from federal taxes. And when you reach age 59½ , you can withdraw built-up earnings tax-free, as long as your money has been invested for five years.

2. What is in it for you?

   An opportunity for substantially higher retirement income because your earnings won't be taxed when you withdraw them. Higher wage earners in particular can benefit, since they may be unable to contribute to deductible IRAs.

3. No required minimum distributions, and contributions can be made after age 70½

   These features make the Roth IRA a versatile planning tool -- especially as Americans lead longer and healthier lives. Today, the average 70-year-old male can expect to live another 10 years; the average female, another 14 years.

4. What is in it for you?

   The potential for additional years of tax deferral, since the Traditional IRA requires you to take minimum distributions beginning at age 70½ . What's more, you can continue to contribute to a Roth IRA for as long as you have earned income.

5. Penalty-free early withdrawals for a first-time home purchase

   As with the Traditional IRA, you can withdraw Roth IRA funds for a first-time home purchase (up to a lifetime maximum of $10,000).