The ROTH IRA Explanation
A Roth IRA is an individual retirement account, and
may invest in a variety of options including Real Estate. As with all
IRAs, there are specific elegibilities and filing status requirements
mandated by the Internal Revenue Service. A Roth IRA's main advantage
is its tax structure. Contributions are made post-tax. All earnings and
withdrawals at retirement are federal income tax free. In contrast, contributions to a Traditional IRA are made pre-tax and earnings are tax-deferred until retirement, but withdrawals are subject to tax. Another advantage of the Roth IRA is that there are fewer restrictions on withdrawals than with a traditional IRA. Because earnings can be accumulated tax-free in a Roth IRA it stands out as one of the most attractive retirement plans to employ for the purchase and resale of real estate. Imagine retaining your capital gains and further using these funds to build profits compounded and tax free!
Roth IRA contributions are limited to $4,000 for 2005 and 2006 with a “Catch Up” provision of an additional $500 in 2005 and $1,000 in 2006 for contributors aged 50 or over.
Note that many IRA retirement plans provide “catch-up” provisions allowing additional investments into the plans based upon the age of the contributor. Specifically it provides a broader investment level to those making up for lost time or individuals in the later peak earning years to save at a slightly greater rate as retirement draws near.
The Roth IRA is named after its chief legislative sponsor, the late U.S. Senator William Roth.
Disadvantages
The main disadvantage of a Roth IRA, compared to a traditional IRA, is that contributions are generally not tax-deductible. If one contributes one thousand dollars to a traditional IRA while in a thirty-percent tax bracket, the full thousand dollars is invested. This advantage does not exist for the Roth IRA. It should be noted that the money in a traditional IRA is taxed once it is withdrawn at retirement. If one is in a lower tax bracket at retirement, then a traditional IRA offers a tax advantage.
There are also penalties for early withdrawals. An early withdrawal will result in a ten-percent penalty, and the money can be taxed as regular income instead of enjoying the tax-free status that would apply at retirement.
Since the Roth IRA has not been around for very long and it has relatively low contribution limits as compared to other plans, most existing plans are somewhat under-funded for serious real estate acquisition. It is anticipated that as Roth IRA plans grow over time and start investing more often in the real estate market, their impact in the future could be significant.
Advantages
While the contributions are not tax deductible, the withdrawals are, including all interest accrued. Once the owner reaches retirement, the money in the fund can be withdrawn tax-free. This offers a significant advantage if the investor is currently in a low tax bracket, but expects to move to a higher tax bracket in the future. For example, if the investor is in a 10% tax bracket, an investment of $1000 into a traditional IRA would only offer $100 in tax relief. If the investor retires in a 30% tax bracket, then $300 of every $1000 will be taken away at retirement. While a Roth IRA would offer no current income tax incentives at the point of investment, the investors income would be tax-free at retirement. That is, the Roth IRA is designed to benefit investors in low tax brackets.
There are other various advantages. For example, under certain conditions, up to $10,000 from a Roth IRA may be withdrawn early to pay for a first home.
Perhaps the greatest advantage of the Roth IRA is its lack of forced distributions based on age. All other tax-deferred retirement plans require withdrawals to begin at age 70 1/2 (more precisely, April 1 of the calendar year after age 70 1/2 is reached), and impose an annual minimum distribution once withdrawals begin at any age beyond 59 1/2. The Roth is completely free of these mandates.
Income limits
Roth IRA contributions are limited to $4,000 for 2005 and 2006 with a “Catch Up” provision of an additional $500 in 2005 and $1,000 in 2006 for contributors aged 50 or over.
Note that many IRA retirement plans provide “catch-up” provisions allowing additional investments into the plans based upon the age of the contributor. Specifically it provides a broader investment level to those making up for lost time or individuals in the later peak earning years to save at a slightly greater rate as retirement draws near.
The Roth IRA is named after its chief legislative sponsor, the late U.S. Senator William Roth.
Disadvantages
The main disadvantage of a Roth IRA, compared to a traditional IRA, is that contributions are generally not tax-deductible. If one contributes one thousand dollars to a traditional IRA while in a thirty-percent tax bracket, the full thousand dollars is invested. This advantage does not exist for the Roth IRA. It should be noted that the money in a traditional IRA is taxed once it is withdrawn at retirement. If one is in a lower tax bracket at retirement, then a traditional IRA offers a tax advantage.
There are also penalties for early withdrawals. An early withdrawal will result in a ten-percent penalty, and the money can be taxed as regular income instead of enjoying the tax-free status that would apply at retirement.
Since the Roth IRA has not been around for very long and it has relatively low contribution limits as compared to other plans, most existing plans are somewhat under-funded for serious real estate acquisition. It is anticipated that as Roth IRA plans grow over time and start investing more often in the real estate market, their impact in the future could be significant.
Advantages
While the contributions are not tax deductible, the withdrawals are, including all interest accrued. Once the owner reaches retirement, the money in the fund can be withdrawn tax-free. This offers a significant advantage if the investor is currently in a low tax bracket, but expects to move to a higher tax bracket in the future. For example, if the investor is in a 10% tax bracket, an investment of $1000 into a traditional IRA would only offer $100 in tax relief. If the investor retires in a 30% tax bracket, then $300 of every $1000 will be taken away at retirement. While a Roth IRA would offer no current income tax incentives at the point of investment, the investors income would be tax-free at retirement. That is, the Roth IRA is designed to benefit investors in low tax brackets.
There are other various advantages. For example, under certain conditions, up to $10,000 from a Roth IRA may be withdrawn early to pay for a first home.
Perhaps the greatest advantage of the Roth IRA is its lack of forced distributions based on age. All other tax-deferred retirement plans require withdrawals to begin at age 70 1/2 (more precisely, April 1 of the calendar year after age 70 1/2 is reached), and impose an annual minimum distribution once withdrawals begin at any age beyond 59 1/2. The Roth is completely free of these mandates.
Income limits
- Like many tools that offer tax advantages, the IRS has limited who can contribute. The Roth IRA is only available to people whose income is below a certain level:
- $150,000 to $160,000: Married Filing Jointly
- $0 to $10,000: Married Filing Separately (and you lived with your spouse at any time during the year)
- $95,000 to $110,000: Single, Head of Household or Married Filing Separately (and you did not live with your spouse)