The tax advantages of a Roth IRA have made this investment vehicle very popular among individuals and married couples who are planning for retirement. A Roth IRA is a type of Individual Retirement Account that allows account holders to withdraw distributions tax free if they meet specific requirements. Although contributions to a Roth IRA are not tax deductible, you may not owe any tax on distributions if you are at least 59 1/2 and you have invested in the fund for at least 5 years.

For investors who are looking for ways to diversify their retirement planning portfolio, a Roth IRA offers a tax advantaged savings and investment plan that can continue to grow for a lifetime. After you retire, you may use the funds in your Roth IRA to pay for necessities or personal goals without incurring tax penalties, provided you meet IRS requirements. Instead of taking mandatory distributions at the age of 70 1/2, you can continue to allow your funds to grow well into your 70s, 80s and beyond.

Roth IRA Distributions

While the contributions to a traditional IRA are taken from your pre-tax income, contributions to a Roth IRA are taken from post-tax compensation. Because you have already paid tax on these funds, you will not be taxed on distributions. You become eligible to collect distributions at the age of 59 1/2. As long as you have held the fund for 5 years, you may take distributions before the age of 59 1/2 without paying a tax on the funds you've contributed; however, you will be taxed on any earnings from these funds. [1]

If you become disabled, you may take distributions from your Roth IRA before the age of 59 1/2 without being taxed on your contributions. This feature can prove extremely valuable if you become unable to earn an income because of a serious illness or disabling injury. A Roth IRA may also make it easier to buy your first home. Home buyers can withdraw up to $10,000 from a Roth IRA without tax penalties for the purchase of a first residence.

Converting a traditional IRA to a Roth IRA gives you access to certain tax benefits. When you make the conversion from a traditional to a Roth IRA, you will be taxed on the converted funds. However, you may withdraw the converted funds without a tax penalty. In order to be eligible for distribution, the converted funds must be left in the account for 5 years.

Tax Advantages for Retirees

The tax advantages of a Roth IRA and flexibility of distributions make this investment tool an appealing option for retirees. With a traditional IRA, you are required to start collecting distributions by age 70 1/2. When you collect distributions, you will be charged income tax on these funds. With a Roth IRA, you may maximize the value of your retirement account by allowing the money to continue to accrue value for the rest of your life. When you plan your estate, you can leave your Roth IRA to your loved ones as part of their inheritance.

A Roth IRA can have tax advantages for older married couples. If the owner of a Roth IRA dies, the funds from the original owner's account and the surviving spouse's Roth IRA may be merged in one account without a tax penalty to the surviving spouse. The surviving spouse must be the owner's only beneficiary in order for this tax benefit to apply. As you make plans to provide for your spouse or children after your death, consider the benefits of adding a Roth IRA to your legacy.

http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231050 01/09/2012