What Is a Roth IRA?

Daniel Penzing
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What Makes a Roth IRA Unique?

When investing for your future, you may wonder which type of IRA is best. Do you go with traditional? Or maybe a non-deductible IRA? You might be asking yourself, "Is there even a third option?"

Fortunately, the answer is yes … the Roth IRA.

A qualified retirement plan must meet specific requirements set forth by the Internal Revenue Service. The Roth IRA meets these requirements and offers some unique benefits.

You also can contribute to both a traditional IRA and a Roth IRA each year. Many people use both types of IRA accounts to help optimize their retirement savings.

The rules for traditional, Roth, and non-deductible IRAs are similar. All IRAs offer tax benefits that help reduce the amount of income tax you may have to pay. The main difference is how they are taxed when you withdraw money.

A traditional IRA may offer tax deductions for contributions and tax-deferred growth.

Contributions to a Roth IRA might be treated as after-tax contributions, but earnings are tax-free as long as they remain in the account.

With a traditional IRA, eligible withdrawals are taxed as income. With a non-deductible IRA, eligible withdrawals are taxed as income but the growth in the account is not taxed.

Withdrawals from a Roth IRA are always tax-free. The growth in the account is also tax-free.

Roth Contribution Tax Savings

The second quarter of the year 2019 is the last time you can make an IRA contribution for the 2018 tax year. This is, of course, if you want to do a Traditional, Rollover, or Roth IRA.

So if you’re in a position to contribute money to an IRA, either via a rollover or a Traditional IRA contribution, you may be wondering which type of IRA you should do it in. Especially given that your decisions can have impact on the total taxes paid on the amount being contributed.

Traditional IRA contributions are allowed in most situations, to be deducted from your taxable income for the year. If you are looking to lower your taxable income, this is a good place to contribute money. It is also the only type of contribution that allows you to take money out of the account without paying a penalty before the age of 59 1/2.

However, the money that you contribute to a Traditional IRA doesn’t receive tax benefits until it is withdrawn, usually in retirement. Since you pay taxes on income even before they end up with you, this means paying a higher tax bill in advance.

The contributions to a Roth IRA, on the other hand, are made with money that has already been taxed. So this doesn’t create an extra tax burden for you.

When to Make a Roth Contribution

A Roth IRA contribution can be made at any time, unlike a Traditional IRA contribution which must be made by April 15 of each year to maximize the amount of deductible contributions. Any contribution you make to a Roth IRA is an irrevocable one, which means it cannot be re-directed to a Traditional IRA or a different investment vehicle without paying a penalty on the money you contributed. The contribution does count towards the MAGI contribution limits for the year, so if a contribution has already been made for the year, the contribution must be subtracted from the maximum allowable amount.

Where to Open a Roth IRA

If you've ever considered investing in a Roth IRA, you may have a few questions, the first of which may be "what is a roth ira?". The answers are different for every person and every situation, but the basic definition of a Roth IRA is a type of Individual Retirement Account that allows you to have your retirement money saved in a special account that you create. Roth IRAs were created by the IRS in 1974 and are named after Senator William Roth.

A Roth IRA can be opened alongside other types of individual retirement accounts, such as a traditional IRA. There are several features of the Roth IRA that set it apart from other retirement accounts such as a 401(k) or a Self Directed IRA, and one of those great features is the fact that you can withdraw your Roth IRA contributions at any time without paying any penalty. However, there are a few stipulations to be aware of with this feature.

Contributions you make to your Roth IRA usually have to be taken out by the age of 70 and a half.

While there is no penalty for withdrawing your original contribution from a Roth IRA, you will be required to pay taxes on the amount of your withdrawal. You can choose to spread your withdrawal over multiple years, however, so you won't have to pay taxes on the entire amount you want to withdraw at once.

How to Invest a Roth IRA

Getting started with the investment process can be a bit daunting. There are a lot of decisions to be made, and there is a lot of information to take in. Depending on your level of job experience, you might have some idea what you want to invest in. But even if you don’t, just getting started is step one. Once you have a Roth IRA account opened, your first step is to set up cash.

The best way to do this is to take the money from your paycheck and invest it immediately. By investing your income as soon as you get it, you protect the money from the risk of inflation. You also take the edge off of the up-front cost of setting up your investment. But this is just the beginning.

When you have a cash-based investment like a Roth IRA, it is a great place to put your savings. If you have any money that you want to invest in the stock market, you should consider paying yourself back before you make your first stock investment.

The idea is to make your Roth IRA a place where you will stick to the get-rich-slowly motto. That means not investing any of your money in stocks and using it as a place to save instead.

Try to Take Full Advantage of This Unique Tax-Saving Retirement Strategy

A Roth IRA is a relatively untapped vein of retirement saving. When you want to put money into a tax-free retirement fund, this is an ideal option. In fact, many experts say it’s one of the best retirement saving methods available to you.

But that doesn’t mean it’s easy to understand. With so many options available to you, it’s hard to know which one is the best. You could go with a 401(k) plan, an Individual Retirement Account (IRA) or a Roth IRA account. Plenty of articles have been written on these topics, but in this article we’re going to look at Roth IRAs specifically.

Some confusion exists because a Roth IRA is technically a “new” type of investment. It was created in 1998, and now it’s open to everyone (with some income restrictions). But it’s still not widely used, and many people who can use it may not be aware of it.

So before we jump into the details of what a Roth IRA is, let’s talk a little about what it isn’t.

What a Roth IRA isn’t?