Introduced to the United States tax code in 1997, the Roth IRA (named after chief sponsor of the law behind it, Senator William Roth) is both one of the newest types of individual retirement arrangement (IRA) available and one of the most versatile. Further, the Roth IRA represents one of the very few investment vehicles allowed by the Internal Revenue Service (IRS) that can potentially lead to tax free earnings for United States taxpayers. This last is so utterly unique that almost all financial planners and investment advisors suggest that their clients should have at least one Roth IRA. Further, since this represents one of the few legal ways to avoid paying taxes, there are regular efforts in Congress to see the Roth IRA legislation repealed and preventing the creation of new Roth IRAs.

The Traditional IRA is basically a tax deferment scheme, whereby the individual contributes money to it and is allowed to deduct these contributions from his or her annual tax liability. Then, once they begin removing money or assets from the IRA, the tax becomes due – so tax payment is deferred. In a Roth, the process is very different. Instead, a person is fully taxed on the money he puts into the Roth at that time, however any earning made on that money once it is in the IRA is completely tax free as long as the owner removes the earnings in accordance with the Roth’s basic policies and procedures.

Further, in a Traditional IRA one cannot begin withdrawing funds from it until they reach the age of fifty-nine and a half without having to pay a ten percent penalty for doing so. However, with a Roth IRA the owner is allowed to remove his or her original contributions – though not any earnings – at any time with no penalty and no questions asked. In fact, one way to withdraw funds from a Traditional IRA early without paying the penalty is to convert the traditional into a Roth and then wait for the requisite “seasoning period”, which is usually five years. In many cases, people getting close to retirement calculate that the taxes that will be due from their Traditional IRA considerably outweigh the expense of converting the IRA to a Roth and therefore do so to avoid paying higher taxes upon retirement. This, in fact, is one of the reasons some legislators want end the Roth IRA option.

Unlike a Traditional IRA, a Roth IRA provides no immediate tax benefits to the owner. However, if used properly as part of a long-term investment strategy for retirement, the Roth IRA can be one of the best options available. People that do not need the tax relief immediately, but suspect they will later, should certainly consider a Roth IRA. However, the decision should be considered carefully as there are a number of downsides and disadvantages to Roth IRAs as well, which any prudent financial advisor should be able to explain in detail. Buying a Roth IRA could be one of the best financial moves you will ever make if you take the time to learn how they work and how they can be used in your specific circumstances.