The Roth IRA is the simplest, easiest, most effective tax-free savings plan imaginable. Not only do your earnings accrue on a tax-free basis, but withdrawals are free of taxes as well.

If you're confused about the myriad of retirement plans that you have to choose from, let me make it easy for you. The Roth IRA is probably going to be your best bet, hands down. It's more flexible than a 401(k) or a traditional IRA and it will probably allow you to accumulate more money for retirement.

I can think of one exception where the 401(k) may be better. If your employer matches your contributions, you probably want to contribute to a 401(k). But contribute to it only to the point that your employer matches your contribution. Beyond that, put your money in a Roth IRA. And even if your employer matches your 401(k) contribution, it is usually the case that you have to stay with the company for a certain number of years before you actually own your account. If you don't plan to be there that long, then opt for the Roth IRA.

Maximum Contributions

For 2005, the contribution limit to a Roth IRA is $4,000 if you're under age 50 and $4,500 if you're 50 over. However, there are proposals before Congress to raise that limitation or remove the limitation altogether.

Income Ceiling

If you're single and your adjusted gross income is higher than $95,000, or $150,000 if you're married, the amount you can contribute to a Roth IRA begins to decrease. It reaches zero for incomes of $110,000 for single people and $160,000 for those who are married. But there are proposals to remove the ceiling, making all Americans eligible.

Tax Advantage

The big attraction to the Roth IRA is the tax break it gives you. If you contribute to a 401(k) or a traditional IRA, you get a tax deduction in the year of your contribution, which reduces your taxes for that year. And you won't pay taxes on interest, dividends, or capital gains while you're working. But you will pay taxes when you go to withdraw the money at retirement.

With a Roth, you don't get the tax reduction on contributions, but after that it's completely tax-free. You never pay taxes on interest, dividends, or capital gains -- not while it's growing, not when you make withdrawals. Never. That's a huge benefit.

No Distribution Requirements

Remember that a 401(k) account and a traditional IRA are just tax-deferred, not tax-free. The government wants its money when you make withdrawals. So you are required to start making withdrawals at age 70 1/2. But since Roth IRAs are tax-free, the government doesn't care how long you let it grow. So if you don't need the money you can just keep letting your account grow, free of taxes, for as long as you want.

Early Withdrawals

Withdrawals from a traditional IRA or an employer-sponsored retirement plan before the age of 59 1/2 could led to taxes and penalties. That may not be true with a Roth IRA. You can withdraw the money that you contributed at any time without penalty. However, the earnings on your contribution may be subject to tax and penalties. So a Roth also has an advantage over other retirement plans if you plan to retire early since you can first remove your contributions without tax or penalty.

If you appreciate the tremendous advantages of tax-free savings and investing, the Roth IRA is hard to beat. Do you have one yet?

Copyright Larry Holmes