What is a Roth IRA?
You will probably have heard about retirement accounts, called Roth IRA. But can you really explain what they are and in what situation it is desirable to put money into such an investment vehicle? If you can answer these questions with a clear yes, you can stop reading here. Others may read on and learn the basics.
IRA stands for Individual Retirement Account. Its called Roth IRA because Senator William Roth of Delaware introduced the bill into Congress, that established this new kind of IRA in 1997.
The conceptual difference of a Roth IRA compared to a traditional IRA is that contributions to the IRA are in general not deductable from your taxable income. Instead withdrawals from a Roth IRA are generally tax free. A Roth IRA is therefore funded with money that has already been taxed.
The advantage of a Roth IRA is that the growth of the money within the account is tax-free as long as the funds are not withdrawn before a certain age. This is also the reason why the government has restricted these retirement accounts to individuals who do not exceed certain income levels. Also the yearly sum that can be contributed to a Roth IRA is limited.
Therefore as far as you qualify for paying into a Roth IRA it is mostly advisable to do so. On the other hand, because the payments to the Roth IRA are not deductable in the year of payment, people with large incomes may be better of with a traditional IRA.
