Roth IRA really rocks when compared to traditional plan
May 28, 2006
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Actually, it's unfortunate that more people aren't intrigued by the Roth because in the race to outlast your retirement nest egg, the Roth could easily be your Trifecta winner. As long as you take some simple precautions, you can use the Roth to sink money into an account that's hermetically sealed against all further taxes – even after you're long gone. That's even better than Tupperware's lifetime guarantee against chipping, peeling and cracking.
Here's the nitty gritty on Roths: Withdrawals from any Roth are tax-free, as long as the account is at least five years old and you're at least 59½. What's more, you can withdraw the actual contributions – as opposed to the earnings – at any time without getting dinged with taxes. Suppose you sunk $4,000 into a Roth last year and then lost your job and desperately needed cash to pay a health insurance premium. The Roth's escape hatch allows you to pull out the $4,000 without tax or an early withdrawal penalty. The Roth can also be a boon to older investors because they aren't required to begin raiding their accounts when reaching the age of 70½. The IRS isn't interested in flushing out the cash from senior citizens' Roths because withdrawals won't generate any lucre for the federal coffers. Even better, heirs can keep the Roth tax barricades erected long after an investor's obituary notice is yellowed and brittle. The money that beneficiaries extract from a Roth is also tax free.
In comparison to the robust Roth, the traditional IRA suffers from flaccid muscle tone and pasty skin. Its best feature is its upfront tax carrot. Those who qualify to invest in a traditional IRA will receive an upfront tax break based on their income tax bracket. If you contribute $4,000 and are in the 15 percent tax bracket, you'd get a $600 tax break. All the money that accumulates in the account, however, will be taxed on the back end when withdrawals begin. And unlike the Roth, required minimum distribution must begin shortly after an owner turns 70½. With Congress spending Monopoly money on Capitol Hill, I'd rather stuff as much as I can in a tax-free Roth than worry about what the tax rates will be like when I retire.
Happily, most people can qualify for a Roth. If you're single, you can make the maximum contribution into a Roth as long as your adjusted gross income doesn't exceed $95,000. The figure for married couples, who file taxes jointly, is $150,000. Those who make slightly more than these amounts, are eligible to make partial contributions. This year you can invest $4,000 into a Roth or traditional IRA and if you're at least 50, you can toss in another $1,000.
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