February 27, 2015

What is a Roth IRA?

Times are hard, and you need to know how to invest your money for the future! What is a Roth IRA, and how can it make your money work for you? Is this the right investment for your retirement? Can anyone use them for retirement, or is it restricted? There are a lot of questions around investing wisely, and here we’ll be going over how you can use them to plan for your retirement and beyond. If you want to know more, keep reading!

What is it?

It’s a variant of the traditional IRA (individual retirement agreement) that gives you more personal control on how you’re going to save for your retirement. This kind of IRA came about in 1998 as part of the Tax Payer Relief Act, and is generally bundled with 401K plans that are offered by employers. Each situation is different, and you’ll have to see if it will really help you save money. But what are the benefits over a traditional IRA or 401k that you can take to the bank? What are the benefits?

Benefits are:

  • One of the biggest benefits of a Roth IRA over a traditional IRA is you only get taxed once, and the principal, or the money you have saved towards the account, keeps growing without being taxed.
  • You don’t have to fill out crazy tax forms each year for the IRS to check over, unless you withdraw and then you pay taxes on it like any income.
  • You pay your taxes upfront now, saving money later when taxes increase over time.

Is a Roth IRA Right for You?

If you’re trying to find a way to avoid taxes on your retirement, this is a great way to do it. Keep in mind though that when you make contributions to a regular investment account, you can get a deduction on your taxes for making a wise investment. If you’re in a high tax bracket now, and will later make much less, you will want to consider your options. If you ever need to do an early withdrawal, you could pay a ten percent penalty on your “earnings” as well as pay taxes on it as taxable income.

Are You Eligible for a Roth IRA?

Eligibility is dependent upon income. If you make over $100,000 a year, you may not be eligible, and you can’t invest more than $5,000 a year (you also have to make at least equal to the amount you’re investing). While this might not seem like a lot of money, you can contribute $5,000 every year for the next 20 years and you will have saved up $100,000 for your retirement. Each spouse can have an account, and as long as you make regular contributions, you can have an account.