Just What is a Roth IRA?

The Roth Individual Retirement Arrangement (or Roth IRA) is a system of saving for retirement and is named after the senator who promoted it.  This is an alternative saving system and while there are plenty of standard IRA plans it can be difficult to choose the right one.  Many people are not aware that there are differences between the plans.  As with all systems the Roth is not necessarily the right choice for everyone.

This form of IRA can provide the saver with a tax-free savings growth and is a very simple method of saving.  The IRA is only taxed once although the contributions that are made to the plan are not tax deductible.  When money is withdrawn from the plan it is not taxed, although those who are saving with a standard IRA are taxed when income is taken from the plan.

Both the Roth plan and a standard IRA should be able to give a good return on monies saved.  The main difference between the two is the tax issue.  It is important to consider what the tax rates are at around the time of withdrawal and work out from there which is the best option.

Those who consider that they will be in a low tax band when they retire will perhaps be better suited to the traditional IRA plans.  This is due to the fact that there will be fewer tax liabilities while the contributions are being made and will be paying fairly low rates of tax as income is produced from the plan as income will be lower again.

However, those who may be in a higher tax band when they receive the income from the plan when compared to the tax band they fall into at the time the contributions are being made will find that they are better suited to the Roth plan.  It is also suitable for those who are planning on rising through the ranks throughout their career as this means that income will rise as they get older rather than staying fairly static.

The Roth plan does also have the added benefit of protecting the savings more effectively than some other plans.  It is recommended for many people that if they are eligible for the Roth plan then they should go ahead with that one.  Those who have taken out the Roth plan may find that this is the best plan to be in if for any reason they are no longer able to make contributions as the monies that have been paid in are protected.

In order to withdraw monies from the Roth plan the saver needs to be aged at least 59 and a half as withdrawals before this can incur penalties.  There is also a regulation that the plan needs to have been in place for at least 5 years.

Savers need to be aware that there are several variations of the Roth plan so it is a good idea to study them carefully to determine which one suits the personal circumstances of the saver as well as their plans for their retirement.

Guest post by Ben Jenkins – a financial freelance writer

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