The Roth IRA is a variation on the retirement savings theme: It's built with after-tax dollars and, in general, makes it easier to save and withdraw money when needed.
But the advantages of a Roth IRA come at a price: Contributions aren't deductible. For many, this minor sticking point is more than offset by a Roth IRA's tax-deferred growth and tax-free distributions at retirement.
"I'm a big fan of Roth IRAs," says Matthew Tuttle, a registered investment adviser and president of Tuttle Retirement Solutions in Stamford, Conn. "The money grows tax-free, and when you retire, it's all yours. Who knows what the tax rate will be on a Traditional IRA in the future? If you pass Roth IRA money on to your children, they don't have to pay taxes on it, either. It's one of those too good to be true tax breaks that you should take advantage of."
Contributions to a Traditional IRA may be tax-deductible depending on your income, filing status and coverage by an employer-sponsored plan.
There's no early-distribution penalty on certain withdrawals from a Roth IRA, and this eliminates the need to take minimum distributions after age 70 1/2, allowing your savings to grow if you have other retirement money set aside.
Many companies have eliminated the brokerage fee on Roth IRAs, but a few providers may still charge $25 to $50 per year per fund. Be sure to ask about services provided and about any startup or termination fees if you switch providers. In general, fees are competitive and in most cases won't determine where you keep a Roth IRA.
Remember: There's no deduction for contributions to a Roth IRA, but if you meet specific requirements, earnings are tax-free when you or your beneficiary make withdrawals.
Major banks, including J.P. Morgan Chase, Bank of America, Citigroup and Wells Fargo, are a good place to start when researching IRAs. Don't overlook the major brokerage houses, including Merrill Lynch, and mutual funds such as Fidelity's.
The Roth IRA, created by the Taxpayer Relief Act of 1997, is named for William V. Roth Jr., a Delaware Republican who served in the Senate from 1971 to 2001 and backed legislation creating the retirement saving plan. Roth said he sought to encourage IRA investment by all Americans, not just high-income individuals.
Roth died in Washington in December 2003. He was 82.
