What is a Roth IRA? | Home Finance Help

A common question facing young investors is, ?What is a Roth IRA and how do I start one?? I?m glad that question is being asked because any smart investor will incorporate a Roth IRA into their plan.

What is a Roth IRA? ? Definition of a Roth IRA

A Roth IRA is a holding account for retirement savings, think of it like a bucket. To add to your bucket, you contribute after-tax income. At 59 1/2 you can begin to withdraw from your bucket tax-free.

The money in your bucket is allowed to invested to grow in securities as stocks, mutual funds, bonds, and cash.

What is a Roth IRA? ? Purpose

The IRS?s purpose for developing Roth IRA?s was to give individual investors an incentive for putting money away for retirement. When you retire 100% of the money you have stored plus its interest is yours.

A Roth IRA gives you 100% of the responsibility to save for retirement. You may still get money from social security and your employer through a 401K or pension plan, but starting and maintaining a Roth IRA is your responsibility.

What is a Roth IRA? ? Traditional vs. Roth IRA

There are many differences between a Traditional vs. Roth IRA?s, the biggest difference being contributions. When you?re contributing to a Roth IRA, you?re contributing after-tax income. There are no tax deductions for contributing to a Roth IRA, but once you reach 59 1/2 your withdrawals are tax-free.

In a traditional IRA, you?re allowed to deduct the contributions you make to a Traditional IRA from your gross income. This saves you on current year taxes. However, withdraws from a Traditional IRA are taxed once you get to retirement.

For 99% of young investors a Roth IRA will be better investment. The two biggest reasons include the value of your contributions is increased because $1 after-tax dollar is greater then $1 before-tax dollar. Essentially, even though they share the same limit, you?re allowed to invest more into a Roth IRA. Second, your tax bracket is likely to rise. Therefore, you would rather pay taxes now when your bracket is low, then in the future when it will increase.

What is a Roth IRA? ? The difference between a Traditional 401K/Roth 401K and Roth IRA

A 401K is set up through your employer. Your employer picks the funds, and you must invest in those funds. Unfortunately, that also means your employer picks the expense ratios.

An IRA stands for Individual Retirement Account. You?re 100% responsible for setting up, making contributions, withdraws?etc.

What is a Roth IRA? ? Difference between taxable accounts and IRA?s

Investor?s looking to maximize returns will avoid putting money into taxable accounts for retirement. Dividends and income from taxable accounts are taxed every year. Once you start selling the investment to fund your retirement you owe capital gains tax on the growth, which is currently 15%.

Investments inside of tax-qualified accounts like 401K?s and IRA?s grow tax-free. Roth IRA?s are even tax-free if you withdraw after 59 1/2.

As a general rule for retirement savings, invest up to your employer match in your 401K, then max contribute to a Roth IRA, then go back and contribute the maximum to your 401K. After you have contribute the maximum to each account, open up a taxable account and invest with taxes in mind.

What is a Roth IRA? ? What you can buy

You can hold just about any investment in a Roth IRA. The best option is for young investors is to diversify your IRA with index funds. Once you get older and closer to your withdraw period, you should move to the more conservative options, that you can invest inside Roth IRA?s, like bonds and cash.

What is a Roth IRA? ? Conclusion

There are lots of difficult ways to become a millionaire. You can work 70-hour weeks and forfeit time with your family and friends, or you can start a Roth IRA and enjoy growth with no work. It?s the easiest and best way to grow your wealth.

There is a lot more to know about Roth IRA?s, please read each page on Roth IRA?s on this site, click on the links for continuing education, and if you have more questions consult a financial adviser before making any choices.

Source: http://www.thehumblemumble.com/what-is-a-roth-ira/

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