Sunday, February 16, 2014

Roth IRA: The Tax Rules

We cover Roth IRA tax rules in detail. Roth IRA is not only a retirement plan but also a tax plan. This clearly implies that you should follow those Roth IRA Tax Rules.

The Individual Retirement Accounts, IRAs, are governed by rules established by IRS, Internal Revenue Service. Each IRA type has its own tax implications. You should therefore make an education decision about which IRA to invest in taking into consideration your current and future financial position.

Very first Roth IRA tax rule is that your contributions to Roth IRA must be taxed. It grows tax-free as long as you keep the account active. The second tax rule is that you don’t pay any taxes on earnings if you are above 59.5 and your account was in existence for more than 5 year.

Generally, the tax rules associated with Roth IRA calculator favors people who are likely to earn more in the future. Individuals who expect to make more in their retirement years thanks to their long-term investments should choose Roth IRA. The reason is quite simple: Roth IRA grows tax-free as the tax is already paid when you contribute to your account and you don’t have to pay taxes for your Roth IRA distributions. That is, it is better to pay taxes when your income is low.  When you make more in your retirement years due to your assets, you are better off not paying any taxes.

In most of the cases, the future taxes are often high and that is why Roth IRA is the ideal retirement plan. You would rather meet you tax obligation on your IRA contributions today when you make the payments, rather than waiting for your retirement. When you fund your IRA account with after-tax money, the funds are exposed to a tax-free growth rate.

The earnings on Roth IRA are withdrawn without attracting any tax or penalties at maturity. The earnings are considered to mature if the account has been in existence for at least five years and the account holder is older than 59 ½ years. There are also other cases where the account holder may be allowed to withdraw the earnings on his funds free of taxes and penalties. These special cases are outlined in the IRS publications 59 and they include health cases, for instance in the event of emergency medical expense, difficulty cases, for instance if you are unable to meet a given essential education expense.

So keep those rules in mind when thinking about opening a Roth IRA account, after you used our Roth IRA calculator.

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