The Roth individual retirement account, or IRA, is one of the simplest -- but effective -- tools that an investor can have in his retirement portfolio. One of its biggest disadvantages is that the contributions you make to a Roth aren't tax deductible since they come from after-tax dollars. However, Roth accounts offer several important advantages.
Can Carry Multiple Accounts
Although there is a limit to how much you can contribute to a Roth (typically $5,000 per year for people younger than 50 and $6,000 annually for those 50 and older), you can have more than one Roth account in your investment portfolio. This means that once you max out the contribution to one Roth for the year, you can deposit the rest of your money in a second (or third) one and have the same benefits applied to those savings.
You can withdraw money from a Roth IRA tax-free at any age, as long as you meet very simple requirements. For investors younger than 59 1/2, you can withdraw your contributions -- but none of the earned interest -- without paying taxes or an early withdrawal penalty. If you are at least 59 1/2 and the account has existed for at least five years, you can withdraw any amount you wish without penalty.
Investing Can Start at a Young Age
If your 16-year-old son is working part-time at a fast food restaurant that deducts federal and state taxes from his paycheck, he can immediately start investing in a Roth for his retirement. This is because the Roth doesn't have an age limit. Since his taxable, modified adjusted gross income isn't likely to exceed $110,000 annually, he may open a Roth account.
No Withdrawals Required Due to Age
A traditional IRA requires that you begin making withdrawals when you reach age 70 1/2. But with a Roth IRA there is no requirement that you start withdrawing funds at a certain age, meaning you can leave the money to keep accruing interest well into your retirement. Some people decide to not the touch the money at all and instead leave the Roth as an inheritance to a relative.
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