Investing In A Roth IRA–Benefits On Earnings Make Roth Accounts More Popular But Should Investors Convert?

Individuals who are attempting to plan for retirement often have a variety of options, like traditional IRAs, Roth IRAs, and 401(k) plans. Yet, attention has been given to Roth IRAs as of late due to opportunities which may allow some investors to convert their current retirement account to a Roth IRA. Benefits that come from earnings on a Roth IRA have made this type of retirement savings opportunity more popular, but there is some concern over whether investors should convert at the present time.

Many investors turned to Roth IRAs simply because benefits that come from the ability to withdraw their earnings tax free upon retirement. Obviously, there are age requirements for different retirement accounts which must be met before an investor can begin withdrawing, but Roth IRAs allow the withdrawal of earnings to be tax-free, whereas a traditional IRA has a required distribution clause and withdrawals on earnings are taxed.

However, with the traditional IRAs, contributions can be written off, so investments in a traditional IRA are still considered pretax income and, upon withdrawing funds from this account which, again, are required at a certain age, the investor must begin paying taxes. It’s for this reason, that many investors feel that a Roth IRA is more beneficial since an who investor accumulates a great deal of earnings may suffer under a traditional IRA or other retirement account which will levy taxes against withdrawals, as opposed to a Roth IRA where these earnings will simply be kept by the investor.

While there are different benefits to various retirement plans, new rules in converting to Roth IRAs have many considering making the move, but there are some advisers who caution against switching retirement accounts, even if a Roth IRA seems more appealing. Obviously, if an investor is close to retirement, the amount of money they may lose on converting to a Roth IRA could put a dent in their overall retirement amount. Also, there are some situations where, if an investor were to convert at the present time, they may pay higher taxes due to their current tax bracket, but when they must pay taxes on their retirement account later in life, they may be in a lower tax bracket and will have to meet smaller costs.

Obviously, each investor’s situation will be different, and for those who are seeking a retirement account, a Roth IRA may be beneficial later in life, but again, caution has been advised for individuals who have already begun investing in their retirement as converting to an IRA, despite its benefits, may not always be in one’s best financial interest.