There are many different types of retirement accounts including 401K plans, traditional IRAs, Roth IRAs, annuities and more. One of the most popular options is the Roth IRA, which was introduced under the Taxpayer Relief Act of 1997.



The Roth IRA offers several advantages, including tax-free growth and flexibility in making withdrawals. Contributions are made to a Roth IRA from earned income that has already been taxed by the Federal government; therefore, you do not pay federal income taxes on the withdrawals. There are no taxes paid on capital gains for a Roth IRA either.

The main difference between the Roth IRA and the traditional IRA is that with a traditional IRA, any contributions you make are tax-deductible and you do pay taxes on any withdrawals you make.

Contribution Limits to a Roth IRA

In 2008, people who are age 49 or younger could contribute up to $5,000; people 50 and over $6,000. Beginning in 2009, Roth IRA contribution limits will increase by $500 per year.

Tax Advantages to the Roth IRA

Roth IRA owners are allowed to withdraw up to the total value of their contributions at any point in time without having to pay the 10% early withdrawal penalty or any federal income taxes.

People who have Roth IRAs are not forced to make withdrawals at any age; unlike other retirement plans that require a minimum distribution after the age of 70-1/2.

If a Roth IRA owner dies, and the surviving spouse has a separate Roth IRA, the spouse may combine the two Roth IRAs into one without penalties.

Under some circumstances, one may withdraw up to $10,000 without penalty to be used for the purchase of a home. The home must be their principal residence and they cannot have previously owned a home for at least 2 years.

If you are in a low tax bracket when you contribute to an IRA, and then, in a higher tax bracket when you withdraw the money, you still do not have to pay taxes on the distribution. This is a great reason to contribute the maximum amount that you can to a Roth IRA while you are in a low tax bracket. You will never be taxed again on that money no matter what tax bracket you are in.

Michael McGee is a financial advisor who understands all the terms and conditions and income tax advantages to investing in a retirement plan. Michael is well-qualified to analyze your financial situation and to advise you as to what type of investment account to have to secure your future. Read more articles on wealth building and investing at http://wealthbuildingdetroit.blogspot.com/