What is a Roth IRA – Pros and Cons

Investing a portion of your savings for retirement is one of the most important things you can to secure your financial future. The problem is that there are literally hundreds, if not thousands, of opportunities in which an individual can ‘invest’ for their future. Our personal favorite is the Roth IRA.

What is a Roth IRA?

Individual retirement accounts (IRAs) are common investment vehicles that are used for retirement savings.  IRAs can be broken down into two basic forms; Traditional IRAs and Roth IRAs. While both of these accounts fall under the same general label, there are a few significant differences that an investor should understand before finalizing their investment decision.

Roth IRAs were created approximately 15 years ago by Congress via the passage of the Taxpayer Relief Act of 1997. They were, for all intents and purposes, treated similar to traditional IRAs except where specifically indicated by the IRS tax code.

For example, individuals are not generally permitted to contribute more than $5,000 to their Roth IRA in any given tax year. Additionally, any income earned on the funds held in a Roth IRA are not taxable (which a few notable exceptions to be discussed in subsequent posts).

Like most investments, there are pros and cons of investing in Roth IRAs.

Pros of Roth IRAs

• Tax-free earnings (qualified distributions are generally not included in your gross income)
• Minimum distributions do not apply – IRS Code section 408(a)(6) and (b)(3) are not applicable
• No early distribution penalty

Cons of Roth IRAs

• No tax deduction for contributions
• Extremely strict eligibility requirements
• Investors may actually receive a greater tax benefit by investing in a traditional IRA (depending on their income level at retirement)

Why We Love Roth IRAs - Final Thoughts

Roth IRAs allow individuals to grow their net worth tax free in lieu of getting a tax deduction now. Furthermore, you can essentially put any investment you want into your Roth IRA, including stocks, bonds, mutual funds, CDs, and even websites.

Saving for retirement via a Roth IRA is a smart way to take charge of your financial future.  It is, however, important to consult with a certified financial planner before making any investment decisions. Since the best investment options are specific to each individual, you may actually receive greater tax benefits by investing in a Traditional IRA.