Traditional IRA or Roth IRA? Reasons to Take the Roth IRA Plunge
By Saghir Aslam
Rawalpindi, Pakistan

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Congress gave investors a gift in 1997, in the form of the Roth individual retirement account.  But many folks haven’t even taken off the wrapping paper on this great gift.
Many people feel it is too good to be true.  People worry Congress will take the benefits away.  That’s unlikely.  It would be so politically unpopular.  Financial advisors that I regularly speak to are split in the middle.  Half of the advisors say that Congress will take this great gift back while others disagree.  I personally have decided to go with it.  Read on and decide what is best for you.
Still on the fence?  Maybe you will change your mind after considering the benefits.  The tax savings are just the beginning.  The Roth IRA also eliminates a fistful of accounting headaches, while offering some great financial flexibility.  Consider:

Tap your IRA early

 

Traditional IRAs have always meant a trade-off.  On the one hand, you get tax-deferred growth and, if you qualify, a tax deduction as well.  But you also typically can’t touch the money before age 59 ½ without incurring taxes and a 10% penalty.  And even after age 59 ½, you still have to pay income taxes on all taxable withdrawals.
The Roth is a different animal.  There is no initial tax deduction.  Instead, all withdrawals after age 59 ½ are tax-free, assuming the Roth has been open for five years.
But here’s the real surprise: Even before age 59 ½, you can pull out everything except the account’s investment earnings and avoid all taxes and penalties.  For instance, suppose you put away $2,000 a year in a Roth for 10 years.  You can pull out the accumulated $20,000 at any time and owe Uncle Sam nothing.  Doesn’t that sound great?  It sure sounds terrific to me. 
What if you convert your existing IRA to a Roth?  Sure, that triggers a big tax bill on the taxable amount converted.  But if you will need cash to pay for, say, early retirement, it could be a smart move, because you can pull out the sum converted before age 59 ½.  To avoid penalties, however, you have to wait until five years after the conversion.
But ideally, you should leave your money in your Roth for as long as possible.  It’s not just tax-deferred but tax-free also.  That’s the beauty.  So why would you withdraw the money, instead allow it to grow tax-free. (To be continued)

 (Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)

 

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Editor: Akhtar M. Faruqui
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