The IRA and the Roth IRA are excellent individual retirement savings programs. These IRAs allow you to sock away up to $3, 000 per year if you are under age 50, and $3,500 per year if you are older than 50. There is no dollar limit on the amount that can go from an IRA to a Roth IRA.

The unique part of the Roth is that you can receive your money tax-free when you retire. Thus, the Roth IRA is one of the best ways to build a retirement nest egg without worrying about paying taxes on your money at a later date. This feature should prompt everyone to at least investigate contributing or converting to a Roth IRA.

There are several unique attractions about the Roth IRA that the traditional IRA or other retirement programs do not provide. The most important is that you can withdraw your money at retirement tax-free. That is not the case for your 401(k) retirement savings, your TSP, your social security payments or your employer-sponsored pension plan.

Features of the Traditional IRA and Roth IRA

Rolling Over Your 401(k) to an IRA and to a Roth IRA

You can move your traditional IRA and other qualified retirement funds into a Roth IRA for that tax-free treatment, provided that your adjusted gross income (AGI) is $100,000 or less. Moreover, there is no limit on the amount that you can rollover to a Roth IRA. Keep in mind that it is only after your funds are invested or rolled over into a Roth IRA that your retirement nest egg grows thereafter tax-free.

Caution: The amount transferred from your traditional IRA to your Roth IRA is taxable, but it is not subject to the 10% early withdrawal penalty. So, before transferring your traditional IRA or other retirement funds to a Roth IRA, it is advisable to consult with your accountant about the tax pluses and minuses of converting your retirement funds to a Roth IRA. If you find that you can not afford to pay the tax associated with the conversion of all your funds you may want to convert only a portion of your funds so that your taxes will on only be for the portion that is converted.

No Penalty For Some Roth IRA Early Withdrawals

Under special circumstances you can withdraw funds from your Roth IRA before you reach age 59½ without paying taxes or a penalty. How? Your Roth IRA funds must be at least five years old. Also, the money you withdraw must be used specifically in cases of disability, death, or the purchase of a first home ($10,000 lifetime limit) for you or your immediate family. Consult your prospectus to see if other fees may apply.

Estate Tax Advantage with Roth IRA

While both IRAs are subject to estate taxes, the beneficiaries of Roth IRAs will not have to pay income taxes on their Roth IRA distributions. That is not the case with other retirement monies received by beneficiaries. Therefore, if you are looking for a tax-advantaged way to accumulate assets for heirs a Roth IRA may be a better alternative.

Stretch IRA

Stretch IRAs, a.k.a. legacy IRAs, multigenerational IRAs, allow the beneficiary of an IRA to "stretch" the period of time that earnings within the inherited IRA (traditional or Roth) can grow tax deferred. With a "stretch" IRA, a beneficiary is able to take distributions from an inherited IRA over his or her own life expectancy.

 The beneficiary may also get to name a successor beneficiary to continue to receive the annual distributions should the original beneficiary die with funds still in the inherited IRA.  Thus, a Stretch IRA can grow tax-deferred beyond the lifetime of the person who established the IRA for the benefit of multiple beneficiaries who may span several generations.

Not all IRAs allow you to stretch.