by Schleuss

Think about what you believe about retirement.  Your vision of retirement may involve launching a second career, starting your own business, going back to school, or traveling the world, as well as enjoying your leisure time.  While past generations often relied primarily on pensions in retirement, it is now possible to rely on an array of investments to fund retirement.  Conventional wisdom says you may need three-quarters your current income to maintain your post career lifestyle.  Opening a Roth IRA is an excellent strategy for people who truly want to achieve their retirement goals on day.

A Roth IRA is a breed of IRA effective as of January 1, 1998.  Named for Sen. William Roth of Delaware in 1997, Roth IRAs were enacted, effective the beginning of 1998. Since that time there have been Technical Corrections, Proposed Regulations, and various IRS Notices, including one which put a limit on how many times a taxpayer can go back and forth between their Traditional and Roth IRAs.  We’ve also added new words to our vocabulary like recharacterization (the act of moving your IRA conversion back to a traditional IRA, or moving your annual IRA contribution from a traditional IRA to a Roth, or vice versa) and reconversion (the act of taking that recharacterized conversion and putting it back into a Roth).

In order to understand what a Roth IRA is it is important to know what IRA stands for.   An IRA is an INDIVIDUAL RETIREMENT ACCOUNT.  An IRA is a personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.  The basics of a Traditional IRA are the  following:  Considered tax deductible contributions (depending on income level), withdraws begin at age 59.5 and are mandatory by 70.5, taxes are paid on earning when withdrawn from the IRA, funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.), available to everyone (no income restrictions), and all funds withdrawn (including principal contributions) before 59.5 are subject to 10% penalty (subject to exception) (Kennon 2008) .

A Roth IRA promises tax free income, as opposed to a traditional IRA’s tax deferred income.  Contributions to the Roth IRA are not tax deductible.  As long as the Roth IRA has been in existence for more than five tax years, and the withdrawal is made after the account holder has attained age 59.5, or the withdrawal is made on account of deathor disability or is for a qualified first time home purchase, the earnings in the account will be totally free of income tax.  In addition, contrary to a traditional IRA, contributions to a Roth IRA can be withdrawn at any time without income tax or penalty.  It should be noted that earnings withdrawn from a Roth IRA that do not meet the criteria for tax free treatment, will be subject to income tax, and may also be subject to the 10% early withdrawal penalty.