Roth IRAs function much like traditional IRAs, except they have very different treatment for income tax purposes. Contribution amounts are the same for Roth plans as they are for Traditional IRAs, and also have the benefit of tax deferral of investment earnings, with a powerful twist.
The powerful twist is that as long as a Roth IRA has been in existence for at least five years, and you are at least 59 1/2 years old when you begin taking distributions, the withdrawals will be 100% free of income taxes.
- Tax-Free Withdrawals – If you meet certain requirements, you can start taking distributions without having to pay any income tax on the earnings in your Roth IRA account. This will provide you with a form of tax diversification, providing you with at least one source of retirement income that is not subject to income tax.
- Not Subject to RMDs – Roth IRAs are not subject to required minimum distributions (RMDs), required of other plans when you turn 70 1/2. This means your account can continue to accumulate for the rest of your life.
- No Tax Breaks – The biggest negative associated with Roth IRAs is the contributions are not tax deductible. But if you can live with this, the tax-free distributions waiting at the end of the rainbow will more than make up for it.