Complete Asset Protection

In the 1980s the individual retirement arrangement was established by Congress to allow Americans to set aside money for their retirement. We now refer to this as the traditional IRA for in 1998 Congress created an alternative called the Roth IRA which has several advantages over the traditional IRA in many cases. The Roth IRA is a very different animal than the traditional IRA and has many features that the original did not. For most people there are several Roth IRA advantages that we will look at. Let’s take a look at some of these advantages.

The most popular feature (and the greatest advantage) of the Roth IRA is the fact that once an individual has reached age 59 and 1/2 they can withdraw their retirement monies tax free. In exchange for this privelidge you will forfeit the tax deduction that you would normally receive for a traditional IRA when first depositing your contribution. What this boils down to is a simple question of exchange. Do you want to take a gauranteed tax break up front or hope for a much larger tax break in the future. The Roth IRA owes its tremendous popularity to this feature; the fact that money is allowed to grow and be withdrawn tax free.

In a traditional IRA, you do get the tax deduction on your initial contribution. However, later, when it is time to take distributions (withdraw your money) you will pay taxes on the sum gain realized in your account. The problem arises if you remain in a high tax bracket into your retirement because distributions from a traditional IRA at taxed at the level of your income, meaning that you will pay 28% if you are in the 28% tax bracket rather than a long term capital gains tax which is lower.

Another key component of the Roth IRA (and this is true for a traditional IRA as well) is that within your account you are not taxed on individual transactions. In a typical brokerage account, each transaction that has a gain is taxed. In the IRA you do not have to begin to think about taxes until your retirement (traditional) or never (Roth). When looking at a long period of time before you will need to withdraw the money, it is advised that you consider an IRA for your investment.

One key distinction between the two, the Roth and the Traditional, is that with the Roth there is no point where you will be required to take your money out. In a traditional IRA, once you reach the age of 70 and 1/2 you are required to begin to withdraw your money or you will face a penalty. In the case of the Roth IRA, however you are not required by law to take deductions at any age. In fact, you can continue to fund your Roth IRA (without withdrawing any money) until you are 100 if you so desire.

A key question for the future however is whether the IRA will become a thing of the past. There have been rumblings recently that Congress will change the tax code so that your money is no longer sheltered from taxes as is the case with the Roth IRA. The reason for this is simple. Many believe that government wants their cut of this money and so they will take it. Because of this, many wonder if the main argument in favor of the Roth IRA, the tax advantages, will become moot. So the Traditional IRA, which offers an upfront tax advantage may be the safer way to play it. At this point, it seems uncertain that the current system will be maintained indefinitely. If you have more than 10 years before you are set to retire you may consider opting for a traditional IRA for this reason.

In summation, those are the essential advantages and disadvantages of the Roth IRA over the traditional IRA. There are many other factors to consider when planning for your retirement including IRA limits and Roth IRA limits so make certain to do your due diligence before deciding on a course of action.

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