Phil's Personal Finance Tip of the Day:
Why You Should Open a Roth IRA
By Emily Brandon | U.S.News & World Report LP
Traditional 401(k)s and IRAs give you a tax break while you're saving for retirement, but income tax is due on each withdrawal from the account. With a Roth IRA, you contribute after-tax dollars, but withdrawals from these accounts, including the earnings, are often tax-free. To decide which type of retirement account is best for you, you need to compare your current tax rate to what you think your tax rate will be in retirement.
"If you will be in the same or a higher tax bracket in retirement, the Roth IRA is the better choice," says William Keffer, a certified financial planner for Keffer Financial Planning in Wheaton, Ill. "If you will be in a lower bracket in retirement, then the benefit is much less if existent at all." Here are some reasons to do at least some of your retirement saving in a Roth IRA:
Retirement flexibility. Retirees are required to take distributions from their traditional 401(k)s and IRAs each year after age 70 1/2, and income tax is due on each withdrawal. The penalty for failing to take required minimum distributions is a 50 percent excise tax on the amount that should have been withdrawn in addition to the regular income tax due on the withdrawal. But retirees are not required to take annual distributions from Roth accounts, which gives them more flexibility to withdraw the money only when they need it.
[Read: An Innovative Way to Face Retirement.]
Tax diversification. Having some of your retirement money in pre-tax accounts and some in after-tax accounts adds tax diversification to your portfolio. "If you can do both, do both. You're diversifying the tax characteristics of your retirement money," says Neal Van Zutphen, a certified financial planner and president of Intrinsic Wealth Counsel in Mesa, Ariz. "When I'm in retirement, I may be able to manage my taxable income and still meet my retirement needs by only taking so much out of my traditional IRA and taking the rest out of my Roth IRA to keep me in the lowest tax bracket." Whether or not your Social Security benefits will be taxable is dependent on your adjusted gross income and traditional IRA withdrawals--but not Roth IRA distributions--count as income.
To read the entire article from Emily Brandon | U.S.News & World Report LP:
http://finance.yahoo.com/news/why-open-roth-ira-151137320.html
Don't wait. The time will never be just right. -Napoleon Hill
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