What Are The Advantages And Disadvantages Of A Roth IRA?
An important part of successful financial planning is planning for retirement and the earlier you begin, the better off you will be. There are a wide variety of investment opportunities available to choose from for retirement planning with one of the most popular being the Roth IRA. Since its introduction in 1998, the Roth IRA has offered investors a tax-free investment vehicle that they can use to save for their retirement years. There are a number of advantages and disadvantages to Roth IRAs and knowing what they are will help you make the decision of whether a Roth IRA is the right investment for you.
Roth IRA Advantages
One of the biggest advantages of a Roth IRA is the simplicity of setting up the account. Most people are able to provide the information required for a new Roth IRA within minutes and can set up their account with minimal effort. There are a wide range of options for investing the money contributed to the account and the account holder is not penalized for withdrawing funds that they have contributed to the account before the age of 59 ½.
Account earnings up to the amount of $10,000 can be withdrawn from the balance of the account to assist with the down payment for a home, as long as the home will be your primary residence. You can elect to have the Roth IRA transferred to a beneficiary in the event of your death and the beneficiary can combine that account with his or her own Roth IRA penalty free. With a Roth IRA, you do not have to start taking money from the account once you have reached a certain age and can save the money in the account for as long as you desire.
Roth IRA Disadvantages
One of the biggest disadvantages to a Roth IRA is the strict income limitations that must be adhered to open and maintain an account. If you do not meet the income limitations, you will be unable to open a Roth IRA and if your income increases past the limit, you will no longer be able to contribute funds to the Roth IRA. Roth IRA contributions are taxed on the front end and do not reduce your adjusted gross income for the year like regular IRAs and other retirement plans.
Annual contributions to a Roth IRA are capped at $5,000 per year for individuals that are under the age of 50 and are capped at $6,000 per year for individuals that are 50 years old or older. Earnings from the account can be withdrawn prior to the age of 59 ½, but you will pay a withdrawal fee of 10% for extracting the earnings from the account. There are many advantages and disadvantages associated with Roth IRAs and each should be taken into consideration before making the decision of whether to open an account.
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