What is a Roth IRA?

Roth IRA is short for Roth Individual Retirement Arrangement. The Roth IRA gives people an alternative to the standard retirement arrangement.

The decision to choose a Roth IRA over a traditional IRA can be difficult; many are unsure about the difference between them. The earlier you make the decision on which to invest, the better off you are since your savings will accrue through a longer time line.

The Roth IRA is not appropriate for everybody; many people in the middle income bracket will find it advantageous to have a Roth IRA. The Roth IRA provides tax-free growth and is the simplest form of retirement you can have. In a normal investment account you are taxed twice, while in the Roth (just like a normal IRA)you are only taxed once. In a normal IRA, your contributions are tax-deductible (depends on income), while in the Roth IRA they are not. Moreover, in a normal IRA you pay taxes on earnings when you withdraw your earnings, while in a Roth IRA they are tax-free. If you expect tax rates to increase the Roth IRA would make sense, but if they were to decrease you might be better of with the traditional IRA.

Another difference includes no mandatory age for distribution of earnings with a Roth IRA; with a normal IRA owners must begin to withdraw earnings at 70.5 years of age. Furthermore, with a normal IRA there is a 10% penalty for withdrawal of funds, whereas there is no such penalty with a Roth IRA.

The Roth IRA contributions do not reduce your adjusted gross income, so you wouldn’t be able to bring yourself below a certain threshold to fall under a certain tax bracket. Also, you don’t realize the tax benefits until retirement for the Roth IRA and if you don’t live to retirement, you will lose any tax benefits you might have gained