A Roth IRA can be an excellent retirement savings vehicle, particularly for younger workers and for those who feel that tax rates will be higher in the future than they are now.
With a traditional IRA, workers get an up-front tax break, and the money is only taxed when it is withdrawn in retirement. The Roth IRA turns this concept on its head, eliminating the up-front tax break in favor of tax-free withdrawals in retirement.
This allows eligible taxpayers to put aside money for retirement, have it grow tax-deferred, and take the money out without paying taxes on those withdrawals.
Earned Income Only
The only income that can be used to fund a Roth IRA is earned income, such as income from wages. Income from other sources, including capital gains and interest payments, cannot be used to fund the Roth IRA. That means a worker needs to have earned income equal to or greater than the amount contributed to the Roth IRA.
Understand the Contribution Limits
The contribution limits for the Roth IRA change from time to time, so it is best to consult with an accountant or tax expert before you make your annual contribution.
For the year 2013, eligible workers can contribute up to $5,500 to their Roth IRA plans. Workers 50 years of age and older can contribute an extra $1,000 under the catch-up provision of the plan.
For married couples, each individual can contribute up to their maximum amount into separate IRA accounts.
Eligibility for Continuing Contributions
One difference between a traditional IRA and a Roth IRA is that workers can continue to contribute to a Roth plan after age 70 1/2, something they cannot do with a traditional IRA plan. That can be an important benefit for those who plan to work in retirement and need a way to put money aside for the future with the prospect of tax free withdrawals down the line.
Understanding the rules associated with the Roth IRA will help you make the most of this exciting and unique retirement savings vehicle. If you are convinced that tax rates have nowhere to go but up, getting in on a Roth IRA now could provide the protection you need well into the future.