Unlike a traditional IRA, a Roth IRA does not offer the account holder a tax deduction in the year the contribution is made to the account.
Like a traditional IRA, there are certain income requirements that need be met before contributing to a Roth IRA. Unlike a traditional IRA, there is no method for higher income individuals to make Roth IRA contributions. Specifically, tax payers whose adjusted gross income is above certain IRS defined thresholds, cannot contribute to a Roth IRA.
In a Roth IRA, all of the interest, dividends, and the capital gains are tax-deferred. That means that the account owner does not have to pay taxes on these things each year. This can be an enormous savings for a person’s income taxes.
Unlike a traditional IRA, when money is withdrawn from a Roth IRA account, no taxes are due on any of the funds withdrawn so long as the account owner is over age 59 ½. Since all contributions to Roth IRAs are made with after tax dollars, neither the contributions, nor their earnings are taxable.
For account owners under the age of 59 ½, any withdrawal of earnings on the account’s contributions is subject to ordinary income taxes and a 10% penalty. However, a Roth IRA account holder can withdraw up to the amount of their contributions without paying either the ordinary income taxes nor the penalty on those funds.
This makes the Roth IRA a potential emergency fund if necessary since accessing the money can be done without penalty. However, this strategy can be costly. There is no provision to put the money back into the Roth IRA and all future contributions will be limited by the annual maximum contribution amount. So, an investor who contributes the maximum each year will have no ability to return the withdrawn contributions above and beyond what they already planned to contribute.
Roth IRA accounts are not subject to the Required Minimum Withdrawal provisions that traditional IRAs are subject to. Retirees who expect to not need all of their savings in retirement will often benefit from accessing their Roth IRA accounts last because they will not be forced to withdraw money from them once they reach age 70 ½.