Opening A Roth IRA Gives You Tax-Free Investment Income

2007-03-08 10:33:40

( Financial )



Roth IRA, named after a late senator, became available as savings-for-retirement vehicle in 1998. You are still eligible for opening a Roth IRA although you are already participating in retirement plans that your employer maintains.

In ordinary IRA and Roth IRA, you make regular contributions. Ordinary IRAs give you tax-deferred investment growth. The Roth IRA gives tax-free investment growth instead. So, although your contributions are not tax deductible, you will not owe any taxes on your investment income when you withdraw the money.

Unlike in ordinary IRAs, you don’t have to draw your Roth IRA upon reaching age 70 1/2. If you have other resources to live on after retirement, you may keep your money invested in Roth IRA. In fact, you can continue to contribute into Roth IRA even past that age. That means your earnings continue to grow tax-free.

Opening a Roth IRA guarantees that withdrawals from the account are free of income taxes provided you have owned the Roth IRA account for at least five years and you have attained the age of 59 1/2, or the money is to be used for the first-time purchase of a home, or you become permanently disabled.

There are two requirements to qualify for opening a Roth IRA. First, you or your spouse must have earned compensation or alimony income equal to the amount contributed. And second, your modified adjusted gross income can’t exceed certain limits. Both IRA and Roth IRA have the same contribution limits.

If you are still young, and expect that you will be in a higher income-tax bracket when you begin to withdraw the funds in retirement, Roth IRA is beneficial to you. Should you have doubts whether to consider opening a Roth IRA, you can consult your financial advisor. Just keep in mind that you should select the options that provide the maximum income during your retirement.


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