Roth IRA’s 101
Roth IRAs 101
by Joe Fazchas for www.eRollover.com
In this article, I’ll briefly cover the Roth IRA rules regarding investing practices and taxation. First we have the basic definition of a Roth IRA. Simply put, it is an (I)ndividual (R)etirement (A)ccount that is allowed under the tax law of the United States.
It was named for Senator William Roth of Delaware, who was the chief legislative sponsor. Roth IRA rules are somewhat different than those of traditional retirement accounts, so there are some added advantages. The only “disadvantage” is that contributions are not tax deductible.
With a 401 K, contributions may be deducted from your “pre-tax” earnings, effectively lowering your total income for the year. With other traditional retirement accounts, contributions are tax deductible, up to a certain amount. As part of the definition of a Roth IRA, contributions are taxed as regular income, but distributions are “tax free”.
With both the 401K and traditional IRA, disbursements are taxed as regular income. The idea being that when you reach retirement age, your income and your tax rate will be lower, so paying “deferred” taxes is usually a savings. But, because of Roth IRA rules, some people consider it a “tax shelter” and there are other advantages. Let’s just begin with early withdrawals.
Since contributions are taxed as regular income, tax free withdrawals may be made from the account at anytime once a “seasoning” period has been passed, up to the amount of the original investment. The current seasoning period is five years. In other words, if you contributed $2,000.00 to the account five years ago, Roth IRA rules allow you to withdraw that amount, but not interest earned or profits made through investments, until you reach the age of 59 ½.
In deferred tax retirement accounts, withdrawals are taxed as regular income and may only be made under certain circumstances. Disbursements made after retirement age, including all interest and profits earned are also taxed as regular income. So, basically, if you want to keep more of your profits and interest, then the definition of a Roth IRA, rather than the traditional account, better suits your purposes.
With both the 401K and the traditional IRA, distributions must be made once you reach a certain age. For example, currently people who are 70 ½ must begin taking withdrawals and paying taxes on them. The Roth IRA rules do not include a required distribution age. You could leave the money in the account indefinitely.
The definition of the Roth IRA covers the maximum yearly contributions that can be made by individuals and couples. For 2008, the max is $5,000.00 for individuals under the age of 49, $6,000.00 for those 50 and older. Both you and your spouse may contribute this amount.
Another advantage concerns allowable investment types. Traditional account holders typically invest in stocks, bonds and certificates of deposit. Roth IRA rules allow these types of investments, as well, but one can also choose to hold promissory notes, mortgages and real estate within the account. This does not completely cover the long list that is allowed, but your broker or accountant can give you additional information.
About the Author
Joe Fazchas is a Real Estate investor as well as owner and founder of http://www.ilocadvantage.com/, a company that partners with private individuals and lending corporations nationwide for the sole purpose of financing and/or rehabbing investment properties. All of which is done using a proven “turn-key” Real Estate system…The ILOC IRA.
Please visit our site for more retirement details:
www.erollover.com
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