Roth IRA Movement: What’s So Great about the Roth IRA?

Time to Save Using a Roth IRA?

The greatest benefits of the Roth IRA are tax-free compounding and tax-free income in retirement. It was the idea of Jeff Rose at Good Financial Cents: Start a Roth IRA Movement to educate young people about the benefits of the Roth IRA.  Today, over 135 blogs will participate in espousing the benefits of a Roth IRA.

#1 Benefit of Roth IRA: Tax Free Compounding

One of greatest benefits of using a Roth Investment Retirement Account (IRA) is tax free compounding of earnings. Since the Roth IRA contribution is made with after tax dollars, contributions grow tax free as long as they are withdrawn after age 59 ½ and owner has had the Roth IRA for five years. In general, the longer the time period, the more advantageous the Roth IRA is because of the powerful advantages of compounding.

#2 Benefit of Roth IRA: Tax Free Retirement Income

Unlike a Traditional IRA, money taken from a Roth IRA is not subject to taxes and doesn’t count in determining whether any of your Social Security benefits will be taxable. In contrast, distributions from traditional IRAs are taxable and vulnerable to future increases in tax rates.

Related Reading: “Planning Investment Accounts for Retirement”.

Who Can Open and Contribute to Roth IRA?

Anyone with earned income, subject to the following contributions and income guidelines, can make contributions to a Roth IRA.

Roth IRA Contribution and Income Limits for 2011 and 2012

The contribution limits for a Roth IRA are fairly simple and the same for both 2011 and 2012. Individuals under 50 can contribute $5,000 or 100% of earned income, whichever is less. Individuals 50 and over can contribute $6,000 or 100% of income, whichever is less.

The 2012 Roth IRA Income Limits have been adjusted upward from the 2011 Roth IRA Rules. Contributions for a 2011 Roth IRA can be made until April 17, 2012 and contributions for a 2012 Roth IRA can be made until April 15, 2013.

Benefits of Roth IRA Withdrawal and Distribution Rules

One of the benefits of a Roth IRA is that you will never be required to make a distribution. This gives you more flexibility in when to take qualified distributions or withdrawals and provides additional benefits to retirement tax planning. The 10% withdrawal penalty before age 59 ½ has several exemptions providing additions flexibility in particular cases.

Tax free compounding and tax free income in retirement are the two greatest benefits of a Roth IRA. Anyone who can afford to make the maximum contribution and forgo the immediate tax deduction of a traditional IRA should consider the Roth IRA and its long term advantages.