Ira Contributions

Roth IRA was established in the year 1998 and has certain special features as compared with traditional IRA's. The contributions are not tax deductible but the withdrawal which may be done at any age is exempt from tax. It is not necessary that you receive the minimum distributions after 70 ½ years of age, but you can let it accumulate tax free until you are ready to withdraw the amount. In a Roth Ira just as in a traditional Ira the earnings in terms of dividends and interest grow tax free. The greatest advantage of a Roth Ira is the Ira tax structure.

Funds from a traditional IRA may be converted to a Roth IRA and may be withdrawn provided the minimum period of 5years is completed after conversion. So this may be the right option for you in case you expect your tax bracket to increase at the time of retirement. The main disadvantage of the Roth Ira is that the contributions are not tax deductible. Another major disadvantage is that there is a very heavy penalty for early withdrawal of earnings such as Federal taxes and a ten percent penalty on the amount. One must note that withdrawal of conversions and contributions are tax free once you reach the age of 59 1/2.

An advantage of Roth Ira is that it allows you to withdraw $10,000 tax free and penalty free to buy a new house. The account must have been opened for 5 years. If a married couple is having the account they could withdraw up to $20,000. You may even withdraw funds from it tax free for your child's education and if you happen to touch the earnings you will incur tax but not the 10% early withdrawal penalty.

While opening a Roth IRA one must keep certain things in mind. It is important to select the right financial institution for the opening of the account. One must always check on the minimum contributions required, whether there is an automatic distribution structure in place, what investment options are available and how famous or trustworthy the provider is.

You must have a specified level of income as specified in the IRS guidelines. The limit depends on your filing and marital status. Another benefit is there is no age limit for Roth IRA contributions. The maximum IRA contribution if you are below 50 ½ years of age is up to $5000 annually for the year 2008. If you are above 50 years of age then the maximum IRA contribution would be $6000 annually for the year 2008. You may make contributions to a Roth IRA for your spouse provided you meet income requirements. You may contribute to your Roth IRA any time during the year.

To sum it up Roth IRA may be a better option than traditional IRA considering that your money is not locked up, and you may withdraw it tax free at any point of time.

Ira Contributions |