Many people find that they simply don't know what estate planning and investment tools are a good fit for them, especially once they consider more complicated strategies and products that include both benefits and restrictions. One of the most commonly misunderstood financial products used today is a Roth individual retirement account, or Roth IRA.
When used properly, Roth IRAs offer incredible benefits that may help you build wealth and protect your assets from necessary taxation. However, Roth IRAs come with a number of restrictions that make it impractical for some individuals. Before you open up a Roth IRA and begin pouring your assets into it, make sure that you understand the benefits as well as the restrictions you face.
A carefully constructed estate plan may include Roth IRAs, or may not, depending on your individual circumstances. A strong estate plan can help you preserve your wishes and create a lasting legacy for those you love, and it is never too early to begin planning to care for your loved ones.
What are the advantages of a Roth IRA?
Roth IRAs allow an individual to place a dollar amount per year into the account and let the investment grow tax free. However, the initial investment itself is not tax deductible, and the law maintains strict caps on how much a person may put into the account each year to enjoy this benefit.
The primary advantage of this form of investment account is that it allows after-tax investments to grow tax free once they are in the account, as long as the investments remain in the account until the investor reaches a certain age. The exact age when you may safely withdraw funds may change with shifting estate planning laws, but it was recently 59 years and six months. As long as the funds remain in the account until the creator reaches the proper age and has had the account open for at least five years, the investor does not have to pay additional taxes on the funds' interest growth.
In simple terms, the initial investment is taxed prior to entering the account, and the resulting interest growth remains untaxed, as long as the investor leaves it in the account until the proper time.
The amount that a person may contribute in a given year depends on the age and income of that person. This threshold changes over time and may also fluctuate depending on individual circumstances, so it is crucial to understand how these issues translate to your own circumstances.
For instance, you may open a Roth IRA and contribute to it only as long as your annual income remains below a certain level. Once you exceed that threshold, you can no longer create or contribute to the account.
Is a Roth IRA right for you?
If you believe that a Roth IRA is a good fit for your financial needs, now is time to take the next step. The longer you wait, the less time that your investment has to mature and grow tax free.
Be sure to carefully inspect your finances and financial needs to determine how a Roth IRA may help you achieve your investment goals and secure your future.