The Roth IRA was enacted in 1998 and ten years later, people are still asking "just what is a Roth IRA?" If you don't know or want to learn more about the Roth IRA, keep reading to find out how it works, why it can be beneficial and whether it's the right choice for you.
What is a Roth IRA? Basically, a traditional IRA gives employees a tax deduction for their retirement investments.
The proceeds of those investments are then taxed once the employee retires and starts to withdraw funds.
Now, a Roth IRA is almost the complete opposite.
Basically, retirees can withdraw from their accounts without any tax penalties or being charged any taxes.
However, they get no tax deductions up front for making contributions.
Who should choose a Roth IRA? Every type of retirement saving plan is designed for a particular type of individual and financial situation.
Though the Roth IRA can work wonders for some, it's not always the right solution for everyone.
Before you opt for a Roth IRA, look first into a 401(k).
One of the best benefits of a 401(k) is if your employer will match your contributions up to a certain percentage.
If so, that's free and tax free (at the time of contribution) money that you could be passing up by opting for a Roth plan.
You should at least contribute up to the amount that your employer will match.
However, if you suspect that your tax rate will be higher when you retire, then the Roth IRA is likely right for you.
For example, if your tax rate currently hovers at 25%, but you suspect it could be as high as 40% by the time you retire, then it's smarter to opt for the tax-free income later rather than sooner.
If you don't know what your future tax rate will be, simply look at your current situation.
If you believe you're at your peak earning potential and nearing retirement, then you 're not likely to increase your income significantly.
However, if you're just starting out in your career and on your way up, then you may be better off investing now.
Who can qualify? The income limitations on Roth IRAs are significantly higher than those for a traditional IRA.
With a basic IRA, your income must be $60,000 or lower.
With this plan, a married couple can make up to $160,000.
In the hopes of helping you understand what is a Roth IRA, you should now have a clear grasp of the benefits and drawbacks of this retirement savings plan and whether it's a good choice for you.