The income tax benefits of a Roth IRA are the mirror image of a traditional IRA. There is no income tax deduction for Roth IRA contributions, but earnings in the Roth account are never taxed (if the distribution rules are followed) and there is no required minimum distribution after age 70.5. Like the IRA, there are contribution limits and income ceilings that restrict the amount you can add to a Roth IRA account in a given tax year.
The Roth IRA offers more investment flexibility than a traditional IRA, particularly for investors under age 59.5. Principal can be withdrawn from the Roth without taxation or penalty at any time. Tax-free withdrawals of earnings from a Roth IRA are generally disallowed until the later of five years or age 59.5. A limited number of exceptions to the tax-free earnings distribution rules are permitted.
From an estate planning standpoint, the Roth IRA is superior to the IRA. Unlike the IRA, there is no income tax liability created at the death of the Roth IRA owner. Beneficiaries still must take distributions from the Roth IRA account over their life expectancy, but the withdrawals are tax-free and the account value could still be subject to federal and state death taxes.
Subject to income limitations, a traditional IRA account can be converted to a Roth IRA, but income tax is due on the full value in the year of conversion. Some employers have added a Roth option to traditional 401(k) plans to allow employees to contribute much higher annual amounts than with a Roth IRA. Like an IRA, contributions to a Roth IRA/401(k) are limited to taxable earned income.
A balance retirement plan should include an IRA and a Roth IRA to take advantage of the complementary tax benefits they offer.
