Feb 11th, 2008
Working Backwards: What’s a Roth IRA?
A Roth IRA is a variation on the previously mentioned traditional IRA. It is named for its chief legislative sponsor, Senator William V. Roth, Jr. of Delaware and was established in 1998. In a Roth IRA, contributions are made with post-tax dollars (unlike a traditional IRA, where contributions are in many if not most cases pre-tax). Provided the rules are followed (primarily holding period and age), earnings and withdrawals are free of taxation. As long as the account is open at least five years and the account holder is age 59 1/2 or older, the terms allowing tax free withdrawals are made. The Roth IRA allows identical contributions to a traditional IRA per year, with catchup provisions for those 50 and older. One of the less acknowledged differences between these two types of IRAs is the mandatory retirement age: 70 1/2 for the traditional IRA, but non-existent for the Roth. Income limits for eligibility mean not everyone can open a Roth IRA; almost anyone (as long as they have earned income) can open a traditional IRA.
It can be tricky for some investors to choose between a Roth IRA and a traditional IRA. If you cannot currently get a deduction with a traditional IRA, I think the choice is clear that the Roth would be a better deal; however, if you can get a deduction with the traditional IRA, the choice becomes more difficult. In some cases, the only way people can afford to put money into an IRA would be using the Traditional IRA–the tax deduction can be significant. However, if you believe you will be in a tax bracket that is close to if not higher than your current one in retirement, the Roth can be a huge bargain. Personally, I think the Roth IRA is one of the greatest inventions since sliced bread!
[...] her purposes with this lump sum of money, Chris would seem to be best served by a Roth IRA. She meets the income qualifications and already has a 403(b) plan which she contributes to; she [...]
[...] year in terms of take home are larger, which allows me to fund some other savings vehicles, like my Roth IRA. If I could afford it, I would hit my maximum even earlier; in fact, I’m considering if I [...]
[...] Apple is a profitable company that pays no dividend, with a price to earnings ratio of 23.26 (which for a tech company is reasonable if not actually low). Year to date the stock is up approximately 50%! That absolutely trounces the major indices which are basically at break even for the year. It falls for me into that category of companies like Amazon, Google, and Netflix–profitable companies that are the best at what they do in the world. I hold AAPL in both a regular brokerage account (no tax implications so far due to no dividends and my not selling a single share–yet) and my Roth IRA. [...]
[...] Morris makes up only about 1% of my portfolio and is yet another stock held in my Roth IRA, so I have no concerns with taxes at this time. Ethical concerns aside, Philip Morris seems so far [...]
[...] a mutual fund in my Roth IRA which is atypical (for me, anyway)–it’s not an index fund, it’s not an ETF, and [...]
[...] year to date versus the close to breakeven performance of the S&P 500). It’s held in my Roth IRA so I’m not concerned about taxes at this point; it pays a small 2.07% dividend yield as well. [...]
[...] investing are great, so even though I can’t put more money into my 403(b) for this year, my Roth IRA and regular brokerage account will continue to be filled as the months go [...]