Simply defined, a Roth IRA is a modified individual retirement account (IRA) in which a person can set aside 'after-tax income' up to a specified amount each year as determined by the US Government. Earnings your Roth IRA are tax-free, and you may make tax-free withdrawals after the age 59 1/2.

Generally speaking, a Roth IRA invests in securities, which typically consists of common stocks or mutual funds, but could also include other types of securities as well. All IRAs have specific eligibility and filing status requirements which are mandated by the IRS.

Advantage of a Roth IRA:

• The main advantage of a Roth IRA's is its tax structure in the eyes of the IRS.


• Individual contributions to a Roth IRA are made from income you've already earned (ex: income that has already been taxed and is not tax deductible), with the advantage being that withdrawals up to the total of your contributions are federal income tax free, and withdrawals of earnings (anything above the total of your contributions) are usually federal income tax free as well.


• On the flip side, individual contributions to a traditional IRA may be tax deductible if you meet certain eligibility requirements, but also consider that if you withdraw money from your traditional IRA it included as traditional income and subject to normal income tax.

Disadvantage of a Roth IRA:

• The main disadvantage of a Roth IRA when you compare it to a traditional IRA is you're your contributions are NEVER tax-deductible with a Roth IRA.


• Let's say you contribute $3,000 to a traditional IRA while paying into a high tax bracket, usually you can expect to receive a tax deduction, substantially reducing the initial cost of contributing, but unfortunately you can't do this with a Roth IRA. So if you're not able to max out your IRA contributions, and you end up in a lower income tax bracket at retirement, you would theoretically end up with less cash by choosing a Roth IRA over a Traditional IRA.


• Consider that there are also severe penalties for early withdrawals of your earnings if you go with a Roth IRA. If you make an unqualified early withdrawal of your earnings this will result in federal income tax plus a ten-percent (10%) penalty on unqualified amount withdrawn. The good thing is there are many exceptions, like purchasing a home for the first time and paying certain educational expenses.


• Additionally, there is always the risk that Congress may opt to tax earnings on Roth IRAs over the next few decades.

Getting your head around various Roth IRA options can be difficult at best, www.retireology.com is here to help answer some of the important questions and give you relevant info about Roth IRAs!