Where Roth Is The King

Individual Retirement Accounts (IRA) have been around since 1974. However they were very restricted and not everyone could have one. The first big restriction was if you had a pension or some other types of retirement plan from your employment, you could not invest into an IRA.

Then in 1981 the laws changed (as they always do) to make it possible for everyone to be able to invest in an IRA. The second biggest restriction on an IRA is that the money you invest into it has to be earned income. If you don't have a job or employment where you earn a paycheck then you can't invest in an IRA.

Another restriction is the amount of your income. With a ROTH IRA after you reach a certain level of income, you no longer can invest in a ROTH IRA but you can still add money to a Traditional IRA as long as it doesn't go over the maximum contribution limit. Is that fair? Absolutely not but that is the way the government works.

Right now income levels are aprox $110,000 for a single tax payer and $160,000 filing jointly. After your income exceeds that then you no longer can invest in an IRA, you must find another investment opportunity. Also the amount you can invest is set now at $5,000 a year if under 50 years of age or $6,000 a year if over 50. These amounts change every year or two so be sure to check with the IRS or tax advisor to stay current.

One more restriction on these IRAs, which are also known as Traditional IRAs, is that the money is tied up until you reach the age of 59 ½. That is the soonest you can start to withdraw any of the money. Another point is if you if you don't start to take the money out at 59 ½ you are forced to start taking it out when you reach 70 ½ years. At this point you no longer can put any money in but you must start taking it out.

Which brings us to 1997 where the Roth IRA was introduced by the late Senator William Roth and has now become known as the King of IRAs.

Both types of IRAs have different tax implications but what makes the Roth King is that is has a bit more flexibility than a Traditional IRA does. First off after the account is over 5 years old you can take out money if needed, but only the contributions part not any gain that it might have received. Also you are not limited to when you need to start taking out payments. At 70 ½ years of age you can still contribute to the Roth and there is no time limit when you need to start taking out the money.

Another great part of the Roth is that you do not pay any taxes on the amount you take out because unlike the Traditional IRA (which has a yearly tax deductions) you pay your income tax on your AGI (adjusted gross income) then put your money into the Roth.

What this means is that when you retire, your monthly income check from your Roth is tax free because you already paid the taxes when you were working. And as you know, taxes will always be going up not down so this will amount to a great deal of money when it comes time to slowing down and enjoying the fruits of all your life-time labor.

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