You know that putting savings towards your future retirement is important, but deciding where to build your nest egg can be a bit daunting. But the Roth IRA has too many tax benefits to ignore. Confusing lingo and acronyms make it hard to choose an appropriate investing method, and trying to wade through the confusion is enough of a challenge to make you start stuffing your mattress with savings. But before you replace your bedding with wads of cash, you should consider checking into a Roth IRA.
What is a Roth IRA?
An IRA (Individual Retirement Account) is an investment plan that allows you to put away money for your eventual retirement. Tax breaks make this investing method attractive to many people, but it can still be a confusing concept. Of course, there are many different ways to invest in an IRA. Having a Roth IRA differentiates from a traditional IRA mostly by when the taxes are paid. Traditional IRA accounts allow tax-deductible contributions; however, when you begin to take money out of this IRA it is taxable at the then-current rate. And rates will most definitely change between now and then.
When you have a Roth IRA, you contribute after-tax dollars as you fund the account. Unlike a traditional IRA, when you take money from your Roth IRA it will generally not be taxed. What you really need to understand about any kind of IRA is that it is not a type of investment itself, but it is the place where you store investments for the future and can take advantage of the tax benefits.
What are the benefits of a Roth IRA?
There are quite a few benefits of having a Roth IRA as a part of your retirement savings plan. Since Roth IRA contributions are made after tax, you generally don’t have to pay taxes on them in later years when you take money out of the accounts, in retirement. This allows you to sidestep higher taxes in the future if you anticipate that you will be taxed higher in retirement than you are now of if you continue to work after you retire. The ability to have tax-free growth really makes a Roth IRA shine. Also, a Roth IRA allows you to withdraw up to $10,000 and put it towards purchasing your first house without penalty.
Are there any limits or restrictions?
There are a few limits and restrictions that you should know about before opening a Roth IRA. First of all, any contributions made to your Roth IRA are not tax deductible like the contributions made to your 401(K) or traditional IRA. There is an income limit, which will exclude you from being able to have a Roth IRA if you make more than the specified amount in that tax year. Finally, there are potential penalties and taxes involved if you decide to cash out your Roth IRA early, so it should be used only for money that you don’t plan on using until retirement.
If having a Roth IRA seems like a good idea for you consider opening a Roth IRA with a low-cost investment company such as Scottrade or TradeKing. Enlist tax help if it still looks like a great idea, even if now it’s a little confusing. A Roth IRA is an excellent way to save money for retirement and know that you won’t have to fuss with tax deductions and higher rates if you are eligible.
Author: KC Beavers
KC Beavers is a semi-retired entrepreneur. The subject of personal finance has always fascinated him. In an effort to not bore those around him with all his love of personal finance as much he has come here to bore all of you instead.