Welcome to 5StarGuide's RothIRA hub. Here we will be discussing several of the ways that Roth IRAs can be used to help you enjoy your retirement comfortably. Since many people are uncertain about what a Roth IRA actually is, let's start by explaining what a Roth IRA does and how it does it. As this resource grows, more and more links to outside sources as well as more information will be posted. First, a disclaimer: As a part of tax law, IRAs are subject to change. What is true today, may not be true in ten years. For that reason, this page will be kept up to date with any changes that are relevant to the retirement planning, but it is advisable to speak to a financial advisor or planner before making the final plans for your own retirment. So, let's get started.
What is an IRA?
Our government in the United States is very much concerned about how American citizens will be able to provide for themselves once they are no longer able to work. The government knows that entitlement benefits are not sufficient to provide for a lengthy and comfortable retirement, and they created an investment vehicle to help indiduals prepare for their own retirement. They did this by creating the IRA (Individual Retirement Arrangement) that hopes to achieve the goal of self-sufficient retirees by using a tax deferrment or tax advantaged account to protect a person's money in the hopes that it will grow through investment. In other words, rather than take some of your money in taxes, only to have to give it back to you in elder-care services, since you will then be too cash-poor to provide for yourself, the government created the IRA to allow you to keep more of your retirement nest egg so that it, the government, wouldn't need to provide the money for you to live on. The idea of the IRA was so popular that IRA's are today offered in a slew of variations and under various designations like the SEP IRA, Education IRA, Simple IRA, and the most-common pair of IRAs: the Traditional IRA and the Roth IRA.
How Does an IRA Help Provide for a Person's Retirement?
With an IRA a citizen can place their money into a brokerage or (self-directed investment) account and defer their tax obligation on it. For instance, in a traditional IRA, a person can place money into an investment account tax free, that is the government doesn't take a slice before you put it in. You then invest the money, typically in stocks, bonds and funds of stocks or bonds, and the money is allowed to grow and grow. Because an IRA is a retirement account, your money can (with only a few exceptions) not be withdrawn from the account until you are older than 59 and one half years old. Should you withdraw the money before that point, then you will have a penalty assessed unless your reasons for the withdrawal fall within the allowable exceptions.
What is a Roth IRA?
The Roth IRA is a unique form of the IRA that provides a specific type of tax advantage. Like any other IRA, the general rules governing it remaining the same: it is an account that you can place money for it to, hopefully, appreciate over time with tax advantages. The unique advantage of the Roth is that the tax advantage comes at the point of withdrawal rather than at the point of deposit. Your deposits will come from your after-tax income but, so long as you are older than 59 and one half years old when you withdraw the funds, you will not have to pay any taxes on them. This is why the Roth IRA is such a popular investment vehicle for when it comes to retirement planning.
Imagine that you are a single male adult that earns $50,000 a year. Your income falls within the limits allowable by law, that is to say you are eligible for an IRA. (Quick note: Rich people are not able to use a Roth IRA, Traditional IRA, or any other IRA. The IRA is not designed to be a tax haven for the wealthy but for middle class and upper-middle class Americans.) The maximum that a person can contribute to their IRA changes over time. Currently a person can contribute $5,000 in a year. You can take that $5k and invest it in a number of investments of your choosing, or investments recommended to you by a financial advisor. If you sell one investment to buy another, you do not have to pay taxes on the capital gains. Your money can grow and compound, assuming your investments increase in value, tax free until you reach the age of retirement. Because of the tax advantage of the Roth IRA, your nest egg will reach a larger sum than it would have otherwise had the taxman taken a piece of your pie. For that reason, the IRA should remain a popular investment option for a long time.
Those are the basics of the Roth IRA. However, to be fully prepared for retirement, you will need to be familiar with a number of approaches and strategies for using your Roth IRA. We will return to the matter in the next edition of this 5 Star Guide to the Roth IRA.