Roth IRA: Important Tool for Retirement Savings

For people looking to save money for retirement Roth IRA is a very important vehicle for their savings. Roth IRA was established in 1998 and is relatively new considering other options. People have sometimes ignored Roth IRA due to several reasons. One of the most common reason is they do not have complete knowledge of how Roth IRA works and in which way it can provide better alternative than other products.

Roth IRA is another Individual Retirement account along with Traditional IRA. Roth IRA has its own benefit and drawbacks. Let us first consider its benefits:

1. Money invested in Roth IRA is after tax money. The interest earned is all tax exempt. That's right you do not have to pay taxes on earnings.

2. There is no minimum distribution requirement at any age. Most of the tax deferred accounts have a requirement of minimum distribution at age 701/2.

3. You have more control of your money. You have minimum control on 401k plan money and there is no way to avoid high fees for 401k plans as you are not able to rollover money while working for the employer. Lobbyists from big firms have taken care that money from 401k plan can not be transferred to IRA easily.

4. Owner of the Roth IRA can withdraw the Principal that he had invested anytime after 5 years. He can not withdraw earnings accumulated in the account. If you invested $2000 and earned $500 as interest, your total balance is $2500. You can withdraw $2000 anytime without any penalty after 5 years of starting the account.

Roth IRA has become a two way savings tool due to its relaxed withdrawal criteria. People save money for there child's education in Roth IRA so that if there child need money he can use it or else the money will automatically go towards there retirement. Unlike 529 plans there is no penalty.

Now I will talk about some of the drawbacks of Roth IRA.

1. The big disadvantage is that the contribution to Roth IRA is not tax deductible. The contributions are made by after tax money.