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What Is A Roth IRA?

When saving for retirement, you have many types of accounts to choose from. One of the most popular is a type of individual retirement account (IRA) called a Roth IRA. The Roth IRA was created as a way to encourage people to save for retirement early and enjoy the tax breaks associated with the account after they retire.

What is a Roth IRA?

A Roth IRA is an individual retirement account created by Senator William Roth of Delaware as a supplement to the traditional IRA. The basic difference between a traditional IRA and a Roth IRA is when contributions are taxed. Traditional IRA contributions are tax-deductible; Roth contributions are not. However, when a person withdraws money from a traditional IRA in retirement, he or she is taxed on those withdrawals. Withdrawals made from a Roth IRA during retirement, on the other hand, are not taxed. Of course, there are some taxes and penalties if one withdraws the money early. The IRS's guide to the Roth IRA is comprehensive (http://www.irs.gov/publications/p590/ch02.html).

How it works

A Roth IRA works very simply. It is essentially an open account into which you can place money. You can use this money to purchase stocks, bonds or mutual funds. You can also use the account as a safe way to store cash, just as you would use your local bank. Each year, individuals below 50 years of age can contribute up to $5,000 to their Roth IRAs. Those over 50 can contribute as much as $6,000 per year.

Who qualifies

Many people, but not all, qualify for a Roth IRA. If you are married and filing taxes jointly, contributions to the account are restricted for those earning more than $150,000 a year. If you file individually and earn more than $95,000 a year, contributions are also restricted. If you fall under these restrictions, a Roth IRA is an ineffective choice for retirement savings.

The target user of a Roth IRA is the average, working person in America who makes less than $95,000 in a single household or less than $150,000 jointly.

After deciding if a Roth IRA is right for you, you should make yearly contributions prior to each year's tax deadline to gain the greatest amount of benefits. You can open one of these accounts with your local bank or credit union, many mutual fund lenders and, if you are Internet savvy, with online brokers. Start saving early with a Roth IRA and enjoy the benefits later.

A Roth IRA is essentially just an open account where you can place investments