The Concept of a Roth IRA Explained

In the following article The Concept of a Roth IRA Explained. Everybody knows that saving for retirement is important and because of that the government has created a number of programs to help you. One of these is the Roth IRA which is a little bit different than most retirement accounts. What makes it different is that it basically works backwards compared to the way that other retirement accounts work. This can be an advantage for some people when they are planning their retirement.

The Concept of a Roth IRA Explained

 A Roth IRA is a retirement account that allows you a tax break on the money that is being distributed by your account. This is different than virtually all other retirement accounts in that most will give you the tax break on your contributions and then charge you taxes when you go to withdraw the money. This is what makes the Roth IRA a useful retirement tool since it allows you to diversify your tax exposure, especially since it can normally be combined with other types of retirement accounts and pension plans that you might have available.

A traditional IRA allows you to make contributions to your account and then receive a tax break on that money. However you will have to pay taxes on the money that you take out of the account. The benefit that this offers is that since most people will have a lower income when they retire they will pay less taxes than they would if they had paid the taxes at the time of the initial contribution. A Roth IRA works in just the opposite way, when you make your contribution you still have to pay taxes but the money that you withdraw from the account will be tax free. If you expect to have a higher income after you retire this is a good option.

When you are deciding on whether to go with a regular IRA or a Roth IRA you are basically deciding on what you think taxes will be like in the future. In large part this is going to depend on the income that you expect to have. However when you are researching a Roth IRA you are also going to want to think about what the tax rate is likely to be in the future. This can be a challenge since it is hard to determine what the government is going to do, but you should put some thought into it.

There are of course all kinds of rules about what kind of contributions you can make to your Roth IRA. One of the huge benefits that they offer is that you can generally have one even if you have other retirement accounts like a 401K. This is not true with a traditional IRA. There are rules about how much you can contribute each year as well, like most retirement funds you should contribute the maximum that you are allowed to each year.

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