How to Pick a Retirement Plan

Many factors are taken into planning when deciding which retirement plan is best for a person. How old someone is, income level, beneficiaries, current state income tax, and other factors contribute to the decision. Listed below are advantages and disadvantages to owning a Roth IRA retirement plan, and the basic Roth IRA rules.

A Roth IRA is a retirement fund that is taxed as money is placed into the account, thus the amount withdrawn is tax free given certain requirements are met. The requirements include that the fund be at least five years old currently, and that the owner of the plan is 59.5 for growth above principal to be taken out penalty free. Traditional IRA plans are tax free as money is placed into the account, and the funds withdrawn are taxed as regular income.

The advantages to owning a Roth IRA include, assets in a Roth IRA can be passed to heirs unlike social security. Converting to a Roth IRA from a traditional IRA is simple, also the funds transferred from the traditional plan can be withdrawn from the Roth IRA tax free. The only stipulation is that the five year seasoning time must have passed on the transferred funds.

Estates large enough to be taxed as estate taxes can be reduced by a Roth IRA. This is because tax dollars have already been subtracted, thus a traditional IRA is valued at a pre-tax level for estate tax reasons.

One of the major disadvantages to having a Roth IRA instead of a traditional IRA is the tax benefits may never be realized. The reason for this is because in a Roth IRA an owner is taxed as the money is payed into the account and not taxed as money is withdrawn. But if an owner does not live to start withdrawing funds, or does not take out the full extent of funds, the full amount of benefit is not realized.

Granted if an owner dies whether or not all the funds are withdrawn may not matter, but then again why be taxed on incoming money when one may not live to see it taken out. Technically the matter is a personal decision, but the benefits of being taxed up front may not be realized and thus is a disadvantage of a Roth IRA.

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