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How the Roth IRA Works

Roth IRAs are types of Individual Retirement Accounts or IRAs that are allowed under tax laws of the United States. The plan is named after its chief legislative sponsor, Senator William Roth, and it has a lot of significant differences from other IRAs.

Just as with any other type of IRA, Roth IRAs have a number of specific eligibility and filing status requirements as mandated by the Internal Revenue Service. The main advantage of this plan is of course its tax structure. Depending on how you set up a Roth IRA, it can be used in many different ways, including the investment of funds in non-typical assets or Self-Directed IRAs.

Differences between Roth IRAs and traditional IRAs
Unlike traditional IRAs, contributions to Roth IRAs are not tax-deductible, although withdrawals are free from taxes. One distinct advantage of Roth IRAs over traditional IRAs however is that there are far fewer restrictions and requirements with regard to withdrawals. Furthermore, all transactions inside a Roth IRA accounts including capital gains, dividends, and interests are not subjected to current tax liabilities. Withdrawals are also generally free of taxes if the account has been in existence for at least 5 years and the age of the owner is above 59 .

Advantages of Roth IRAs
If there is some money left in the account due to conversion from a Traditional IRA, the owner of the Roth IRA has the option to withdraw the total of the converted amount, as long as the "seasoning" period (typically five years) has passed since the conversion of the funds.
Any earning withdrawals become tax-free once the owner reaches the age 59 or becomes disabled, as long as the account has been in existence for five years or more.
Direct contributions to a Roth IRA can be withdrawn at any time with no additional taxes or penalties incurred.
Contributions can still be made to a Roth IRA even if the owner is already signed up with a qualified retirement plan such as a 401(k).

Disadvantages of Roth IRAs
The primary disadvantage of a Roth IRA compared to a traditional IRA is that members contributions are not tax-deductible. With a traditional IRA a member can contribute $1000 and receive a tax deduction while being in a higher tax bracket, and thereby reduce his or her costs of contributing.
The contribution limit has largely been phased out depending on the contributor's income.
The tax benefit may never actually be realized with a Roth IRA, since the person may not live to retirement age or much longer than that. In this particular scenario, the tax structure of a Roth IRA only has the function of reducing an estate that may not have been subjected to taxes to begin with. What this means is that in order to gain the full tax benefits of a Roth IRA, the owner must live until all of the contributions have been withdrawn and used up.

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