The Roth IRA is a newer retirement investment account designed to help individuals to build their retirement nest egg.

In contrast to a Traditional IRA, the contributions made to the Roth IRA are not tax deductible. Also, the funds when withdrawn from the Roth IRA after the age of 59 1/2 are tax-free, unlike the Traditional IRA which is taxable when the funds are withdrawn.

There are restrictions to the Roth IRA that need to be considered, primarily income and contribution amount limits for the individual investor.

There are annual income limits limiting individuals who earn over a specified amount yearly. These limits can exclude certain investors from being able to take advantage of this investment vehicle.

Advantages

Some advantages to the Roth IRA include:

-Traditional IRA’s can be converted into Roth IRA’s with restrictions. This can be a tremendous advantage to individuals who are eligible, as they can pay taxes on the Traditional IRA funds today and then allow those dollars to grow on a tax deferred basis and then eventually to withdrawal them tax-free after the age of 59 1/2.

-The withdrawals on the funds invested into the Roth IRA’s are tax-free when they are taken out after 5 years or the age of 59 1/2.

-Individuals who are eligible can save into the Roth IRA plan as well as other qualified plans, allowing them to diversify their portfolio in terms of tax treatment.

-The tax-free benefits to a Roth IRA offer individuals in retirement relief when they are receiving their retirement funds as income.

-There are not age requirements for distribution with a Roth IRA as they are with Traditional IRA’s. This can save investors a large amount of money and taxes, as forced distributions that occur after the age of 70 1/2 can push an investor into a higher tax bracket than desired.

-Investors can build their own preferred portfolio within a Roth IRA, including mutual funds, individual securities, real estate and other investment options. With this flexibility, an investor can build an ideal portfolio based on their personal asset allocation.

Disadvantages

As well as the many benefits of Roth IRA’s, there are also some disadvantages. Some of these disadvantages include:

-The contributions to a Roth IRA are not tax deductible. In contrast to the Traditional IRA which offers the ability to deduct contributions for some individuals, the tax benefits of today need to be weighed against the perceived and possible tax-free benefits of the future.

-The ability to contribute to a Roth IRA is based on income, with phase out restrictions. These limits can exclude certain individuals from being able to leverage this investment choice.

-There is an annual limit to the amount eligible to contribute annually per investor. This amount is adjusted yearly and should be fully understood before any investment decisions being made. Also, for investors who are eligible to contribute, it is advised to maximize the contribution limit, as there is not a make up contribution for most investors.

Author Bio: James Vignione, administrator of Orion Systems specializes in free personal finance software and financial calculators to help people manage and organize their finances more efficiently. For more information, visit http://PersonalFinanceSoftware.com

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