Why the Smart Money Chooses a Roth IRA

Smart investors are opting for Roth IRAs instead of traditional IRAs

February 27, 2012 RSS Feed Print

[See 10 Ways to Tap Your IRA Early Without Penalty.]

Leave more money to heirs. You heirs will need to pay taxes on money you leave them in a traditional IRA. However, your beneficiaries may be able to receive tax-free distributions of money left to them in a Roth IRA.

Roth IRA conversions. In 2012, individuals earning less than $125,000 ($183,000 for couples) are eligible to make Roth IRA contributions. The maximum amount you are allowed to contribute to a traditional IRA, Roth IRA, or combination of the two is $5,000 in 2012, or $6,000 for those age 50 and older. The maximum possible Roth IRA contribution amount is lower for individuals earning more than $110,000 ($173,000 for couples). However, traditional 401(k) and IRA accounts can be converted to a Roth if you pay income tax on the amount rolled over. The IRS removed the $100,000 income limit for Roth IRA conversions in 2010, which means almost everyone now has the ability to open a Roth IRA by doing a rollover. "You can shift money that you have in a traditional IRA over to a Roth IRA, but you have to pay taxes on that shift," says Russell. But if you make the switch, "All the growth happens tax-free, and you get to take it out tax=free."

Tax diversification. Saving in both a traditional and Roth IRA adds tax diversification to your portfolio and allows you to be prepared for future tax-rate changes. "It allows us to essentially hedge against the risk that capital gains rates or income tax rates are going to go up in the future," says Finke. "We are taxed once on it when we put the money away and then we are allowed to defer additional taxation essentially forever."

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Tags:: IRAs,; retirement,; money,; IRA

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When the article started out by stating that people with "higher IQs invest in Roth IRAs," you know its b.s. and they are trying to convince you get into a Roth IRA. Despite the article, the answer is not that simple. Talk to a CFA, it all depends on your individual financial situation. LOL, and the decision has nothing to do with your IQ. What a load of huey that is. Tell people they are stupid if they do not invest in the product you want them to, what garbage.

Paul of MD 9:31AM October 31, 2012

Amanda of TX: The tax the article is referring to is the income tax withheld from your paycheck. So technically, the money you're putting in your savings account has been taxed. It works the same way with a Roth IRA. The difference between that and the Traditional IRA is that the Traditianal IRA contribution would be deducted from your paycheck BEFORE income taxes are deducted (401K also works this way). Then when you withdraw funds from either of these accounts you pay the income tax that you deferred at the time you received your paycheck. I hope that helps.

Brandi of PA 11:08AM September 04, 2012

I don't understand why you'd have to pay taxes on it in the first play. Taxes are taken out of your check when you're first paid, and then you file taxes of course each year, so why would you pay taxes on money that's already yours? Maybe I should talk to a banking professional, but I think that's ridiculous. I don't pay tax on my savings account, so why would I pay tax on my retirement account?

Amanda of TX 9:59AM September 04, 2012