What Is a Roth IRA?
If you have done any research on retirement planning, you have probably seen the phrase “individual retirement account” – also known as an IRA – many times. This is a basic option for retirement savings. But what about the slightly different Roth IRA? What sets it apart? And what is the best choice for you?
A Roth IRA is an alternative the the traditional IRA format. The main difference is how contributions are taxed. With a Roth IRA, all account contributions are made after tax. Whereas traditional IRAs have up-front deductions, Roth IRAs do not. Instead, they bring tax perks when you reach retirement age. Until then, you are allowed to save your taxed income up to a set limit annually. Once you reach 59 ½ years old, your earnings and withdrawals are not counted as income, and therefore not taxed.
The fact that your money is not taxed once it is put into your Roth IRA is a big draw. It means that your savings are developing tax free. At least in terms of savings, you secure the bracket you are in now as opposed to the one you will be in when you are leaving the workforce. For young workers who predict their tax rate will rise significantly, this is good news.
You are also able to make contributions past age 70 ½ if you still earn income. And unlike with a traditional IRA, there is no required distribution. Because the money is yours – already taxed – you can access it any time. Annual contributions can be large – perhaps even thousands of dollars. Plus, you can use your Roth IRA in addition to a 401(k), if you have one of those through your employer. As you get older, you may also be able to increase your contributions to catch up to your savings goal.
Not everyone is able to open a Roth IRA because of those key tax benefits. People with higher incomes are likely not eligible. However, many other people can access an IRA. You can contribute at any age as long as you have held an income-earning position. It is perfect for low-income citizens especially. They may find the decades of tax-free growth more appealing than an up-front deduction. The impact of taxes during retirements years is greatly reduced as well.