When a Roth IRA Is Right for You

A tax-free source of retirement income would seem to have almost universal appeal. Yet only 13 percent of U.S. households own a Roth IRA, a retirement investment vehicle that offers tax-free qualified withdrawals.¹

The Roth IRA has been around only since 1998, so its unpopularity may be due primarily to misunderstanding. For example, some people may assume that the benefits of a Roth IRA are too good to last — that Congress will change the laws before investors are able to reap the rewards of tax-free distributions.

Some people may shy away from a Roth IRA because they would rather postpone current taxes and pay them later. It's natural to want to delay the unpleasant as long as possible, but if you expect to be in the same or a higher tax bracket in retirement, paying taxes now may save you money over the long run (depending on your circumstances).

Some investors might think a Roth IRA is too complicated. But unlike a traditional IRA or an employer-sponsored retirement plan, a Roth IRA is not subject to annual required minimum distributions after age 70½. As long as Roth IRA withdrawals take place after age 59½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum), and the account has been open for at least five years, distributions will be free of federal tax and penalties.

By comparison, distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to an additional 10 percent federal income tax penalty.

Of course, not everyone is eligible to contribute to a Roth IRA. Income restrictions dictate that taxpayers with an income exceeding $110,000 (single filers) or $160,000 (married joint filers) cannot contribute to a Roth IRA. Also, combined annual contributions to Roth and traditional IRAs are limited to a total of $4,000 ($5,000 for those aged 50 and over) for individual taxpayers ($8,000 or $10,000, respectively, for married couples).

If you have never considered a Roth IRA, now may be a good time to take a second look. Your tax or legal advisor can help you determine if a Roth IRA makes sense for you. The Roth IRA's unique tax benefits may be a good fit for your retirement portfolio.

1) Investment Company Institute, 2005

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