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The Roth Individual Retirement Account (IRA) offers an attractive option for a secure financial future through a retirement plan. With the Roth IRA, distributions are tax-free and the Roth plan does not require that funds be withdrawn at any time. Funds may remain in the account for as long as desired and contributions may be withdrawn whenever needed at no interest and with no penalty. In contrast, 401(k) retirement plans are tax-deferred and have a withdrawal requirement when the age limit is reached.
Those covered by an employer's qualified retirement plan are still eligible for the Roth IRA if the income limits are met. If qualified by an employer's plan such as a 401(k) or 403(b), for those working for non-profit organizations, a good strategy is to first contribute to the company plan at least up to the limit that the company sets for matching contributions and then fund the Roth plan.
Conventional IRA's may be converted to Roths and distributions that have been held for five years from the conversion date are totally tax-free after 59 1/2, when disabled or after death. The contributions may be withdrawn at any time tax-free with no penalty or may be left in the Roth as long as desired to earn more from investment compounding.
Opening Roth IRA's for children with contributions (gifts) or through inheritance is common. The child must have earned income to qualify but need not use this income to fund the Roth plan. Gifts from others may be the source of the funding. These Roth accounts offer the child the advantage of years of compounding and can insure a stable retirement nestegg. Some parents/grandparents who wish to fund Roths for children convert some regular IRA's to Roths to fund gifts but leave other IRA's intact to avoid the large tax bill that would arise if converting all.
Roth IRA's are not particularly advantageous to those over 50 because of the limited time the contributions would be compounding. Also, conversion from a conventional IRA would incur a large tax bill which could seriously reduce financial resources without insuring a rapid compensatory return.
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