The Benefits of Roth IRA's | Home Finance Help

Young investor?s enjoy the benefits of Roth IRA?s more than any other age group. Every day you delay, you?re forgoing the easiest million dollars that will ever come your way.

By saving efficiently you can meet any goal you?ve ever had. There are certain fundamentals that you must take advantage of; the first one being when the IRS is giving you tax break, take it.

The following is a growing list of the benefits of Roth IRA?s.

Advantages of Roth IRA?s

Taxes ? After-tax income is contributed in Roth IRA?s. There are no tax deductions for contributing to a Roth. However, once you reach 59 1/2, your balance is tax-free. By comparison a Traditional IRA?s contributions are tax-deductible, but are taxed upon withdrawal.

Value ? Maximum contributions for a Roth and Traditional are $5,000 ($6,000 if you?re over 50) in 2009. Although the same dollar amount, they are not the same value. The value of a Roth IRA is greater because it?s made with after-tax dollars.

Tax Bracket ? Unless you want your income to stay level, you?re tax bracket is likely to rise. Take advantage of having a low tax bracket, by paying taxes now.

Simplicity ? If we knew what the taxes were going to be in 40 years, the decision to start Roth or Traditional IRA?s would be easier. For example, you start contributions at the age of 20, and plan to retire at 60 with $1,000,000. The simplicity of Roth IRA?s, is that $1,000,000 is $1,000,000. In a Traditional IRA, it?s harder to predict what $1,000,000 is because of the unpredictability of taxes. If your tax rate were 30%, in order to have $1,000,000 of after-tax income you would need a balance of $1,428,571. If you assumed your tax rate was 20%, you would need to accumulate $1,250,000.

Flexibility ? Can always withdrawal your contributions no matter your age. This gives a Roth IRA greater flexibility then a 401K

Buying a Home ? Can withdraw up to $10,000 to buy your first home, including earnings. Read more for restrictions.

Age ? There are no age requirements to start a Roth IRA. You must have earned income, but you can start a Roth IRA as early as you want. You can also start a Roth IRA after you reach the age of 70. More on Roth IRA eligibility

Disadvantages of a Roth

With proper planning most of these disadvantages can be avoided or are negligible.

No Deductions ? A Traditional IRA does let you deduct your contributions, to reduce your current year tax bill.

Earned Income ? You can only contribute to a Roth IRA with earned income. For example, your grandparents may not start a Roth IRA for you when your 5. There are no age restrictions, but you must have earned income.

Phase Out Once you reach a certain income level, $101,000 in 2009, your maximum contribution limit begins to decrease. However, you can still enjoy the benefits of your previous Roth IRA contributions because they are still allowed to grow and be withdrawn tax-free after 59 1/2.

Contribution Limits ? 401K?s have higher contribution limits. However, a smart investor will take advantage of every tax break that the IRS gives them, therefore they will contribute to both.

Start now to enjoy benefits of Roth IRA?s. For right now it?s the best savings tool for young investors. The advantages are even multiplied when you contribute to both a 401K and IRA. I truly believe by using your 401K and IRA, you can reach any savings goal you desire.

As I mentioned above, starting a Roth IRA will be the easiest million dollars you will ever earn. To reach $1,000,000, deposit $2,055 a year for 40 years while earning 10%. It?s as simple as that.

Source: http://www.thehumblemumble.com/the-benefits-of-roth-iras/

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