The Roth IRA has been around since 1998, and yet still, many people are asking the question "what is a Roth IRA?" To find out how a Roth IRA works, its advantages and disadvantages and whether it's right for you, keep reading.
The Roth IRA was enacted in 1998 and ten years later, people are still asking "just what is a Roth IRA?" If you don't know or want to learn more about the Roth IRA, keep reading to find out how it works, why it can be beneficial and whether it's the right choice for you.
What is a Roth IRA?
To explain a Roth IRA, you first have to understand a traditional IRA. A traditional IRA is a retirement savings plan that lets employees have income tax deductions for their retirement investments and savings. Once you retire and withdraw that money, it is then taxed. You're deferring your taxes.
Essentially, a Roth IRA, a new type of retirement account, offers employees the ability to withdraw their proceeds tax-free once they hit retirement. But, they get no tax breaks or deductions for contributing the money in the first place.
Is a Roth IRA right for you?
For some people, the Roth IRA is the perfect choice and allows them to achieve incredible tax savings. For others, it makes little or no difference, and they'd be much better off opting for a traditional IRA.
So, before you choose a Roth IRA, first check whether you're better off with your 401(k). For example, if you have a 401(k) plan, your employer will match your contributions up to a certain level. That's free money which is not taxed and it's hard to pass up. Because of this, many people opt to contribute up to their employee matching maximum and then combine that with a Roth IRA.
But, if you think you'll be in a higher tax bracket by the time you retire, then a Roth IRA could be a great choice. For example, if you're currently paying about 30% in taxes, but you think that tax rate could be more like 40% by the time you reach retirement, you should opt for tax-free income later rather than now.
If you don't know what your future tax rate will be, simply look at your current situation. If you believe you're at your peak earning potential and nearing retirement, then you 're not likely to increase your income significantly. However, if you're just starting out in your career and on your way up, then you may be better off investing in a Roth IRA now.
Who is eligible?
For a traditional IRA, high earners with an income of over $60,000 can't qualify or make contributions. However, the AGI limitations on a Roth IRA are an incredible $160,000 - making it the better choice for high-income earners.
In the process of learning just what is a Roth IRA, you should also now have an understanding of how the plan works, what its benefits are and how you can optimize your use of this new retirement savings option.
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