Homework Week 6
Student: Kevin Erne

Roth Individual Retirement Account (IRA)

For my research paper, I chose the Roth Individual Retirement Account (IRA). As a military member I am enrolled in a pension plan and have never had any experience with IRAs or any other type of retirement plan. During my research, I found some history, eligibility requirements, advantages and disadvantages that I would like to share with you. For anyone considering retirement an individual retirement plan might be a great option to pursue, but that all depends on your needs and future plans. You should start with some research. When I first started my research, I was curious as to what the history was behind retirement. The idea of retiring is relatively new. My research told me that back in the 19th century, the majority of the population worked until they died. Reading between the lines led me to believe that this was based on the average lifespan of the working force. It is estimated that only 4% of the population lived into their 60s. Once they reached this age, they were allowed to live with their families until they passed away. Therefore, the need for a retirement account was not an issue because very few people had a necessity to have one (roth-ira.org). Fast forward to present day and we know that people live quite a bit longer than they did in years gone by. It's not uncommon for people to live well into their 90s and when they do, they need to be prepared to pay for their retirement lifestyle, whatever that may be. One of the more popular retirement options out there is the individual retirement account. There are two types of IRAs, the standard or traditional IRA and the Roth IRA. The standard IRA allows you to deposit money into an account and avoid paying taxes on the account until you are ready to withdraw funds from it. With the standard IRA you save money during the working years but pay taxes on the account when you retire. The Roth IRA differs from the standard IRA in that the money you are depositing into the account has already been taxed and then allowing you to draw those funds tax-free when you reach retirement eligibility. That means you spend more money each year building your account but you will eventually save money when you retire, making the Roth IRA much more popular as a retirement option. Due to eligibility criteria, the Roth IRA is not available to everyone based on income limits, and is therefore restricted primarily to the middle class level of income (roth-ira.org). Now that we have decided to live a long and fruitful life and have decided that an IRA is what we want to establish, we need to know what eligibility requirements there are to consider. There are a lot of resources available that outline what is required to establish an IRA. The most common items to consider are an approved institution, earned income, age and income limits. An approved institution is where you will open and maintain your IRA. In general, these are banks, brokerage firms, credit unions, savings and loan associations, and other FDIC-insured financial institutions. You can also open a Roth IRA online (your-roth-ira.com). Once you have established an IRA, you will need to ensure that your earnings qualify for use with the IRA. Earnings are defined as the "total wages or compensation received by an employee for time worked or services rendered (includes all compensation, overtime, and premium pay) (Henderson 511). Earned income that is usually eligible for investment in a Roth IRA are: salaries, professional fees, wages, sales commissions, insurance premiums, tips, bonuses and Job-related profit sharing. There are also sources of income that are not eligible for investment. The list contains, but is not limited to the following: interest, dividends, capital gains, rental property income, disability payments, social security payments, pension income and annuity income. The rule of thumb is, if you do nothing and still earn money, then that money is not eligible for a Roth IRA (your-roth-ira.com). Anyone with earned income that meets the criteria we just discussed can use a Roth IRA to save towards retirement. In certain situations, your age will determine how much you can put towards your retirement. According to rothira.com, if you are less than 50 years of age, you can contribute $5,000 toward a Roth IRA. If you are married, your spouse can also contribute $5,000 towards their retirement. This contribution limit is a total limit applied across all Roth accounts that you have and not per account. In layman's terms, if you have five accounts, and are under 50 years of age, you can break down your contribution to $1,000 per account. If you are 50 years of age or older, you are also able to contribute an additional $1,000 towards your Roth IRA as a "catch up" contribution (Roth IRA Guidance). As mentioned at the beginning, there are income limitations that prevent everyone from having the opportunity to open a Roth IRA. The eligibility is determined by the maximum income you can earn in a tax year dependent upon your filing status. If you are filing single or head of household: you must earn less than $107,000 to fully contribute to a Roth IRA, married filing jointly or a qualified widow(er): you must earn less than $169,000 to fully contribute to a Roth IRA, and married filing separately: you must earn less than $10,000 to fully contribute to a Roth IRA (Roth IRA Guidance). An advantage to establishing a Roth IRA is the tax free growth. The means the earnings are not subject to income tax as long as you have held the account for at least 5 years, and you are at least 59 1/2 years of age. You can also have multiple retirement accounts. A Roth IRA can be set up even if you have another retirement plan, like a federal pension plan for instance. There are no minimum withdrawal requirements or required minimum distributions as in a traditional IRA or 401(k). Direct contributions made to the account can be withdrawn at any time, tax free. One of the advantages that I thought was important was the fact that your assets can be passed onto a beneficiary after your death (Riddix). There are also a few disadvantages to the Roth IRA. One of the most notable disadvantages is that any contributions you make now are NOT tax deductible and you will have to pay taxes on them. The eligibility requirements listed earlier are considered disadvantages mainly because they are stricter than the traditional IRA. Probably the most unpredictable disadvantage and the one that made me think twice, was the possibility that you may not live to see retirement. An investor must live until their total Roth IRA contributions are withdrawn after retirement to reap the full benefits of this plan, which includes living well into the 70s. On the brighter side, with a traditional IRA, the government may never collect tax from you if you die before retirement (Characteristics of the Roth IRA). Those are just some of the advantages I found on line. There are other differences between the standard IRA and Roth IRA and I encourage you to do some more research. The IRS is a great source of information for IRAs and the tax laws that govern them, as well. They have a handout of the top 10 differences between a Roth IRA and can be found at the Internal Revenue Service (IRS) website. They cover other topics like beneficiary, loans and recharacterization of rolled over amounts. The IRS also has a pretty in-depth handout about IRAs titled Publication 590 that you can download from their website at www.irs.gov. Follow the Retirements Community Plans tab at the top of the page or look for Publication 590 in their search engine. In conclusion, the history behind what drove the need for retirement accounts was people living longer lives. The main difference between a standard IRA and a Roth IRA was the money that went into the standard IRA wasn’t taxed and that is why the Roth IRA is more popular. I also mentioned that if you are 50 years of age or older, you are able to contribute a "catch up" contribution to your Roth IRA for a grand total of $6,000. I also discussed the eligibility criteria required to establish an account. The income standards used to establish a Roth IRA were centered on the middle class and it further differentiated by tax-filing statuses. I included a few of the advantages I found like the tax-free growth and the ability to assign a beneficiary to your account in the event that you should pass away before you have the ability to use it. Finally, I mentioned a couple of the disadvantages of the Roth IRA with the main one being the investor meets an untimely death and is unable to fully reap the full benefit of not using their entire contributions of the Roth IRA. Ultimately, when it comes to your future, after you've worked hard your entire life, it all boils down to what's important to you, educating yourself about what's available and what you can afford to save.
Works Cited
"Characteristics of the Roth IRA." 401k Retirement. 27 Jan. 2012. Web. 25 Feb. 2012.
"The History of Retirement Savings." www.roth-ira.org. 10 June 2011. Web. 23 Feb 2012. Henderson, Richard I. Compensation Management in a Knowledge-Based World, 10th Edition New York: Pearson, 2005
Riddix, Mark. "What Is a Roth IRA – Benefits & Restrictions." - Personal Finance Blog & Guide to Financial Fitness. Web. 25 Feb. 2012.
"Roth IRA Guidance | RothIRA.com." Roth IRA Guidance. Web. 25 Feb. 2012.
"Tax Information for Retirement Plans Community." Internal Revenue Service. Web. 25 Feb. 2012.
Your-roth-ira.com. Roth IRA Eligibility Tab. Web 2012 < http://www.your-roth-ira.com/roth-ira-eligibility.html>