What is a Roth IRA

Saving money for your retirement is encouraged so you don’t stress about your finances as you get older. You are never too young to save money and it is never too late to get started if you put it off. A Roth IRA can be a good idea for your retirement funds. This type of account is set up for individuals. When certain conditions are met, the money can be tax-free.

What is the Difference?

The difference between traditional IRAs and Roth IRAs is how they are taxed. With a traditional IRA, the money is taken from your earnings and placed into the retirement account before taxes. This lowers the amount of tax you pay on your earnings at that time. However, you will pay taxes on the money in your retirement account when you access it.

With Roth IRA accounts, the money is taken from your earnings and taxed at that time. The benefit is the funds placed into retirement are tax-free when you withdraw them. You always know exactly how much money you have in that account because there won’t be a hit on some of it to pay future taxes. If you think you will be in a higher tax bracket when you retire versus right now, this can help you pay less overall.

Individuals are eligible to contribute to a Roth IRA if their gross earnings are less than $140,000. For married couples, the annual gross earnings can’t exceed $208,000.You can continue to add to the account as long as you continue to earn income. The account can be open for an infinite period of time, even after you stop contributing more money into it.

Where to set up a Roth IRA Account

There are plenty of options for where you can set up a Roth IRA account. Talk to the bank you currently conduct business with. You can also talk to an investment company or brokerage firm. Always verify the entity is legitimate with a solid reputation. The money you put aside for retirement should never be in the hands of an entity that may compromise your access to it later on.

A legitimate provider for any Roth IRA account has to be approved by the IRS. Read the disclosure statement and the agreement plan before you proceed with setting it up. Ask any questions you may have. This type of retirement fund can help you save for your future but you need to make sure you understand how it works and what it offers.

There are specific rules this type of IRA operates under. Some entities charge high fees for the services they offer. They can also restrict your options for types of investments. Take some time to compare fee structures and the options you have for investing your funds before you set up the Roth IRA. Do what helps you the most, not what helps the entity where you establish it.

Don’t overlook details about withdrawing the funds from a Roth IRA. While the money is tax-free when you access it, there can be other penalties if you aren’t careful. For example, some providers will charge you a fee if you withdraw from the Roth IRA before 5 years have gone by since it was established. Others will penalize you if you withdraw the funds before you are 59 years of age. Such penalties can be up to 10% of the amount you wish to withdraw.

How much can you Deposit?

Do your best to maximize the amount of money you can deposit into a Roth IRA annually. If you are under the age of 50 you can deposit up to $6,000 annually. For those over 50 up to $7,000 can be deposited annually. The amount changes from time to time, so it’s best you follow along with these changes at IRS.gov and maximize your savings.

Roth IRA contributions can only be made with cash funds. They can’t be made through the use of assets or securities. Once the funds are in the account, there are options for mutual funds stocks, bonds, and more. Talk to a broker to discover how they recommend you should invest to get the best return from your Roth IRA account.

 

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