For retirement saving Roth IRA (Individual Retirement Account) is a fantastic tool. Enumerated below are the benefits and the disadvantages of this account. Please visit a financial planner to understand the transfer transactions properly.
They say “Money saved is money earned”.
Benefits:
1. The money that you put in a Roth IRA is deducted from your taxable income. Also the money you withdraw from the account at retirement is tax free.
2. You can use the money from this account to fund any of the high growth investments. These could be real estate, stocks, bonds or mutual funds.
3. You can put money in IRA for as long as you are earning money. So a 25 year old with 67 years as retirement age continues to contribute $5000.00 per year until retirement, she makes a cool $1,25,000.00 plus at an interest rate of 8%. All contributions are tax free and even when she withdraws money it is tax free.
4. The biggest benefit is that money put in this account grows tax free. So you can invest in stocks or bonds which give a higher interest rate. However, you need to seek advice from a professional financial planner so as to invest as per your retirement goals and attitude to risk. There is no penalty on early withdrawal of the money that you contribute to Roth IRA. Once you are 59 and half years old and the account is more than 5 years old, you can withdraw money tax free.
5. The government allows you to withdraw $10,000.00 to buy a home if your account is more than 5 years old. This money is tax and penalty free. With your spouse you can withdraw a total of $20,000.00. This enables you to fulfill your dream of owning your own pad.
6. The Roth can also help to fund your kid’s college. Though you cannot depend completely on it for college fees, but can certainly use it for the much needed financial help. There is no penalty for early withdrawal in this case.
7. The retirement saving Roth IRA can be willed to a spouse or child after death. Hence it works as a tax free inheritance for your beneficiaries.
Limitations:
1. The government’s limit to gift this money is $5000.00. Plus the money put in this account has to be earned income from a job. Thus money received as a gift cannot be put in this account.
2. You cannot save more than you’ve earned. So if you made $3,600.00 in 2009, you won’t be able to put $5,000.00 in this account.
3. To be able to qualify for the maximum limit of $5,000.00 for a single person, the annual gross income should be more than $5,000.00 and less than $101,000.00. If it is between $101,000.00 and $116,000.00, then you can only partially contribute.
4. For married couples filing jointly, their modified annual gross income must be less than $159,000.00 for making full contributions. If it is between $159,000.00 and $169,000.00, then they can only partially contribute.
5. When you convert a traditional IRA into this account, you will have to pay tax on the entire money converted. You can open this account only with the amount remaining after paying taxes.
Roth should be a part of your retirement saving plan because their benefits far outnumber the limitations.