A Roth IRA is a Roth Individual Retirement Account and it is a specific type of IRA. There are some different types and it is worth understanding a bit more about them.
What is a Roth IRA
The account is offered in the USA and provides tax advantages for those that decide that they would like to use if for their retirement savings. There are some different types available depending on what you want to use it for. A Roth IRA is invested in using after tax assets meaning that any investments that are made have no tax impact and withdrawal from them are normally tax free. This differs from a standard IRA because they are taxed on withdrawal, but there is no tax payable on the money that is paid in. Money that has been directly contributed to a Roth IRA can be withdrawn tax free at any time. Earnings and rollover converted earnings cannot, but after five years it is possible that if the qualifying age is met it is possible that they can also be withdrawn tax and penalty free. Up to $10,000 maximum in earnings can be withdrawn tax free if used to buy a principle residence for the owner of the IRA. It can be contributed to at the same time as another retirement plan. Id The owner dies, their spouse can take over the account and merge it with theirs if they have one and assets can also be passed onto other heirs. There could be a tax advantage over traditional IRAs if it is felt that the tax saved by not paying it on withdrawals is less than would be paid on the money when investing. However contributions are not tax deductible. The asset cannot be used as collateral and there are income limitations on contributions. The tax on money being paid in is paid at the investors current tax rate which is likely to be higher than if they paid the tax on withdrawals in retirement when there is a large chance they will be on a lower tax rate. If the investor does not live long into retirement they may not enjoy any tax savings they have made anyway.
How Does an IRA Make Money?
Like with all investments the money that is regularly invested will grow over time. The company that you invest it with will invest it themselves and pass on some of the growth that they get to you. Over the years that you hold the IRA you should find that the investment therefore grows beyond what you are paying in as the growth will be added regularly as well. This means that by the time you are ready to draw out the money you will be able to draw out regular monthly sums and get an income from the money. Obviously there is an element of risk with investments like this as you may not live long enough to take full advantage of your investment. However, some funds can be passedon to your spouse and others to your heirs, so it is important to be aware of whether the fund offers these benefits or not.