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Is a Roth IRA Account Right For Me?

January 11th, 2009 by Herbert Castillo

by Herbert Castillo

An IRA is also known as an Individual Retirement Account. There are many different types of these accounts. One in particular that I would like to discuss is the Roth IRA.

The Tax Payer Relief Act created the Roth IRA in 1997 in order to take it easy on the social security system and to help people plan for their retirement in personal investment rather than relying solely on their employer’s 401k program. They encourage the people by allowing certain financial benefits if these IRA accounts are used for retirement planning. What are some of these benefits?

For starters, the Roth IRA contributions are not tax deductible. And, most people would probably consider that a bad thing. But think about this. If you contribute the maximum allowed $5,000 (2008 Maximum for under $100,000 annual) from your income and don’t pay taxes on it at time of contribution, then that $5,000 fund is really about a $4,000 fund. On the other hand, if you contribute that same amount to a Roth IRA and don’t deduct it from your income tax form, then it is a true $5,000 fund. Which brings me to my next point.

Another cool thing about the Roth IRA is that funds can be removed after 5 years without penalties. And it will not be taxed since you never deducted it from your income. If you withdraw funds from a traditional IRA before 59 1/2 years of age you are liable for penalties and taxes. And actually the whole IRA will be taxed eventually anyway.

Since the Roth IRA allows you to withdraw funds after only five years of “seasoning”, it makes for a great emergency fund. And the greatest thing is that if you don’t have to use it for emergencies, you have a great nest egg for retirement. These allowances in the Roth are lax relative to a traditional IRA.

The traditional IRA allows for early withdrawals of funds of certain amounts for very specific reasons. For example you are allowed up to $10,000 of your fund at any time to be used in the purchase of a home. The home buyer must be the owner of the IRA, their spouse or one of their children. Plus the Buyer must not have owned a home in the prior 24 months. The rest of the allowances are pretty complicated like this one and very strict.

The Roth IRA suits me and my circumstances. But each person has their own goals and needs. So to find out which IRA is right for you, talk to a financial consultant about the options. Ask plenty of questions so that you can make an educated decision.

About the Author:

My name is Herbert Castillo and I am planning my retirement at age 21 with a Roth IRA Account I admonish all to plan for their future in their youth because it is the best possible time to do so.

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