Investments & Taxes

Why Roth IRAs are Better?

Chances are you have probably heard all the fuss that is the rage over Roth IRAs. It does seem that the truth is if you do qualify for one, a Roth is probably in your best interest as opposed to the traditional IRAs, both the nondeductible and tax-deductible sorts. What sets the Roth IRA apart from the others you ask? Let's take a look.

The first thing you should be aware of is that if your employer offers a 401K plan with a match, you should always max it out before even considering opening up an IRA. Beyond that, why is a Roth better? First, withdrawals from your Roth IRAs after the age of 59 1/2 are usually not taxed like traditional IRAs are. Taxes are paid on the front end because contributions are made after taxes have been taken out of your salary.

Roth IRAs are also much more flexible than traditional IRS accounts. With a Roth, you can withdraw contributions, although not gains, for absolutely anything you want. And the withdrawal is penalty and tax-free! Want to put a down-payment on a new house or a deposit on that new car you've had your eye on? Pay college tuition, pay off debts, anything you want!

The only problem that lies with Roth IRAs is whether or not you qualify. Those who do qualify meet the following criteria:

  • Joint filers with an adjusted gross income that does not exceed $160,000
  • Individuals filers with an adjusted gross income that does not exceed $110,000

If you do qualify for a Roth, you are allowed to make annual contributions of up to $2,000 per person. In addition, if your adjusted gross income does not exceed $100,000, you can also convert money from other IRA accounts into a Roth. In order to convert, you will probably have to pay taxes up front, but over the long term, you will probably wind up making a lot more.