If You Want To Be Rich, We Can Help You! | What Is A Roth IRA?

There are actually eleven different types of IRAs, but the Roth IRA is known for being the simplest Individual Retirement Account that provides the owner with tax-free growth. For most individuals, Roth IRA rates of return are likely to be better than other types of retirement accounts (including Traditional IRAs) due to their tax advantages, but it depends on unique circumstances.

What Is A Roth IRA?

When you contribute money to your Roth IRA, you are contributing post-tax dollars. You’ve already paid taxes on it as income when you received the money and put it into the account, so you won’t need to pay again when you withdraw your money. The money in a Roth IRA grows completely tax-free as long as your withdrawals meet the Roth IRA distributions rules. If you withdraw the money before you meet qualifications for distributions, you’ll pay income taxes on the money and possibly a 10% early withdrawal fee.

In a Traditional IRA, your contribution is tax-deductible in the year that it’s made. That is, if you earn $32,000 this year and contribute $2,000 into a Traditional IRA, you’ll pay income taxes based on just $30,000, since your Traditional IRA contributions are deducted from your gross income to arrive at your taxable income. With a Roth IRA; however, you can contribute $2,000 but you’ll still pay income taxes based on $32,000.  For investors in all but the highest of tax brackets, investing in a Roth will pay off, eventually.

Advantages of Roth IRA

With a Roth IRA, you pay income tax at the start and that’s all you need to be concerned with as far as taxes are concerned. Other advantages of a Roth IRA compared to a deductible IRA include:

• No special reporting made to the IRS.

• Not required to withdraw money by a set age.

• If taxes rise in the future, you pay taxes on the lower rates now.

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