Fifty years ago, most Americans depended on employer sponsored retirement plans and pensions to get them through their golden years. Today, most people are creating and funding their own retirement plans. Many people choose to contribute to an individual retirement account, or IRA. If you are considering an IRA, a Roth IRA may be a good choice depending on your needs and goals. Consider the following information before making your decision:
- A Roth IRA operates in the same way as a traditional IRA in that you contribute funds each year and those funds are then invested in the hope that they will grow over time.
- A traditional IRA allows you to contribute tax-free each year while contributions to a Roth IRA are taxed.
- Distributions from a traditional IRA are taxed. Distributions from a Roth IRA are typically tax-free.
- IRS rules require you to begin minimum distributions from a traditional IRA at age 70 ½.
- There are no minimum distributions required of a Roth IRA
- Your Roth IRA can be passed down to beneficiaries when you die. Your beneficiary can then withdraw the funds without incurring a tax as a general rule.
If you are looking for a “backdoor” method by which you can pass down assets, a Roth IRA may be a consideration. In addition, the funds will still be there in the event that you need them during your own retirement. Be sure to consult with both your tax advisor and your estate planning attorney about which type of IRA is right for you.
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