A Reaction to “What is A Roth IRA Plan?"

The Employee Retirement Income Security Act or ERISA was introduced in 1974 and it included the Individual Retirement Account or IRA.  It allowed for bigger contributions into the employees' retirement fund.  This stipulation was an improvement on the 401K.  The IRA retained the provision of the 401K to allow for tax-free contributions.  Initially, the IRA was open only for workers that did not have employment-based retirement coverage.   In 1981, however, this provision was amended to allow all taxpayers below the age of 70 1/2 to have an IRA even if they already owned a retirement plan.  The new provision likewise allowed plan holders to contribute in behalf of their non-working spouse.   In addition, a so-called "Catch-Up Plan" was implemented allowing plan holders over the age of 50 years to make additional contributions.   There are different kinds of IRA.  There is the Traditional IRA, the Roth IRA, and the SEP IRA.

Perhaps one might ask: "What is a Roth IRA?" and "How does it differ from the other IRAs?"  These questions are normally asked when considering the idea of retirement.   In answer to the question "What is a Roth IRA Plan?" it allows the plan holder to withdraw funds from the Roth IRA tax-free.  The contributions one makes to the Roth IRA, however, have no effect on the income taxes that one has to pay.  Answering the latter question, the traditional IRA allows for the exemption of taxes on the contributions one makes to the fund while the SEP IRA is open for owners of small businesses or self-employed individuals.  The SEP IRA is different from the Traditional IRA because it is registered in name of the plan holder rather than in the company's name. 

And that is not all that answers the question "What is a Roth IRA Plan?" The Roth IRA was established in 1997 when the Tax Relief Act was passed into law.   It was named after the main author of the bill, Senator William Roth.  Its main difference of the Roth IRA from other retirement plans is the tax-free nature of its withdrawals upon retirement but the contributions are not tax exempt. The retirement age is the same as in other plans, not less than 59 1/2 years old.  Consequently, it is a choice between paying taxes now or later.

In recent years the Roth IRA has become quite popular causing people to ask "What is a Roth IRA?"   Besides the advantages of the benefits of the Roth IRA over other retirement plans as discussed above, it has fewer restrictions on the kinds of investments the funds can be put into such as certificates of deposit and even real estate.

In the event that that has not answer the question "What is a Roth IRA Plan?" then perhaps this will.   Withdrawing contributions made to the Roth IRA at any time does not make you liable to pay taxes. Converted funds into the Roth IRA are also tax-free so long as the plan holder is at least 59 1/2 years old and the funds have been in the account for at least 5 years.  The exemption to this rule is when a plan holder withdraws for the purchase of his first principal residence.   The same exemptions to the rules apply on qualified distributions before reaching retirement age as in other retirement plans. These include withdrawals for expenses to defray cost of medical expenses and higher education.   What is a Roth IRA in terms of maximum age limit?   The Roth IRA allows the plan holder to maintain the account even past the age of 70 1/2 years and can be inherited by the beneficiary after the death of the plan holder.

Self-employed individuals or owners of small businesses asking the question "What is Roth IRA?" it would be better to explore either the Solo 401K or the SEP IRA. These accounts are tailor fit for such individuals.