Imagine an investment account that grows tax free and you can take as much or as little out of it for as long as you live. That’s what a Roth IRA is! Unlike a traditional IRA, though, you can only put money that has already been taxed into a Roth IRA.

A Roth IRA gives you a few benefits over a traditional IRA. First, you are not subject to the minimum required distribution rules of the traditional IRA, which is geared to depleting it while you live. Second, having to take money out for you traditional IRA undermines the compounding growth of what you have invested in it. Third, because you do not have to take anything out of a Roth IRA, it is an ideal long-term saving vehicle for tax-free growth of your investment. And fourth, whatever you take out of it is tax free forever.

The chart shows how fast a $100,000 investment can grow in a tax-free account for two hypothetical annual growth rates of 5% and 7% annually over 20 years. The illustration is hypothetical in nature, does not represent any specific investment, does not account for any fees or expenses associated with an actual investment, but if it had, returns would be lower and must be included.

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These benefits mean that if you can delay taking money out of it for a number of years – as the chart shows – you can take advantage of the tax-free growth it can give you. Then take tax-free use of the money when either you or your spouse wishes.

And it can grow tax-free even for your designated Roth IRA beneficiary. When he receives it, he will be required to take a minimum amount out each year based on his life expectancy, but it will still as a tax-free distribution.

What is the price for this benefit? You need to pay tax on any money you put into it. You can convert your IRA holding – as much as you wish – to a Roth IRA, but you need to pay the tax on what you roll into the Roth within the year of rollover. While the conversion to a Roth was previously limited to those with an adjusted gross income of $100,000 or less, as of 2010, there is no limit and anyone may carry out a Roth Conversion.

According to IRA single life expectancy, you have statistically 21 years left when you are 65. The chart shows that an untaxed investment only takes 10 years to double under a hypothetical 7% annual growth rate. The trade off between converting your traditional IRA to a Roth or leaving it alone until you’re 70½ and then paying the tax on your distributions, depends on your retirement income level and your ability to defer your Roth investment for later use.

Contact our office so we can help you decide if converting to a Roth IRA is best for you.

Information in article taken from IRS publication 590.