To Roth Or Not To Roth: An Analytical Study of the Roth IRA
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The Roth individual retirement account (IRA) is a new investment vehicle that was made available for 1998 when the Taxpayer Relief Act of 1997 was passed last summer. Individuals who qualify for the Roth IRA can contribute a maximum of $2,000 per year. The contributions are nondeductible, but earnings are tax-free. The traditional IRA can be deductible for select individuals, but all earnings are only tax-deferred and not tax-free. The Taxpayer Relief Act also allows present owners of traditional IRAs to convert their accounts to Roth IRAs. There are many stipulations to converting, but many Americans can benefit from doing so. Each individual case is distinct, though, and should be analyzed on an individual basis. At a time when people are losing faith in the social security system, it has become increasingly more important for families to take retirement matters into their own hands. Families must decide which vehicles to invest in, to maximize their well being during retirement. Investors are asking many important questions. Should my retirement money be invested in 401 (k) plans or IRAs? If IRAs, traditional or Roth? Am I better off converting my traditional IRA into a Roth IRA or should I keep things the way they are? All of these are important questions, but the answers are extremely complex and not very clear-cut. When deciding where to invest, an individual's entire personal planning picture should be considered and evaluated, so that savings can be maximized and pitfalls and unexpected results can be avoided. In the majority of cases, individuals should contribute to their companies 401 (k) plans at least up to the employer's level of match. After this point, if the individual has more money that he or she can invest, it is often beneficial to contribute to a Roth IRA, especially for estate planning reasons. While these decisions can be made with relative ease, knowing whether or not to convert a traditional IRA to a Roth IRA is a very complicated matter. Converting might affect numerous things, such as social security taxes and a child's financial aid. New provisions are also being debated in Congress right now and any of these might influence an individual's decision. Some people even believe that the Roth IRA is a government scam and that government will decide to change its mind in the near future. For most individuals, converting to a Roth IRA is more beneficial than sticking with a traditional IRA, but each individual case should still be analyzed separately.