Four Things You Should Know About Roth IRAs


Four Things You Should Know About Roth IRAs

Roth IRAs help build wealth while providing flexible contribution and withdrawal options.

Roth IRAs are a way to save and prepare for retirement, while avoiding withdrawal penalties and hidden fees. What should you know about Roth IRAs?

Contributions are Made with After-Tax Dollars

Contributions to Roth IRAs, unlike a traditional IRA (or individual retirement account), are made with after-tax dollars. No, this doesn’t offer an immediate tax benefit, but the benefits are good in the long run.

Contributions may be withdrawn at any time, without penalty, unlike a traditional 401k account. And if you are over age 59½, once a five-year waiting period has expired, earnings on those contributions can also be withdrawn without penalty.

“When you take a qualified distribution from your Roth IRA, you will never pay taxes on that money,” explains Forbes.com. “This allows you to have access to your contributions at any time. That’s an attractive feature for those that want to save for retirement, but are worried about having to pay a penalty if they need access to the money.”

Roth IRAs Provide Flexibility

In addition to flexible withdrawal rules, Roth IRAs allow for more flexible contributions than other 401k accounts. While there is an annual total contribution limit of $5,500 in 2013, (with a $1,000 catch-up contribution if you are over age 50), money can be deposited into a Roth IRA “right up until tax day” of the year following the opening of the account, as Kiplinger.com said.

Significant Savings is Possible

“The idea of saving on your taxes may seem a tad obscure, but it really can pay off big,” notes Kiplinger. “If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of eight percent on her investment, she’ll have $1.4 million saved by the time she retires at age 65. And the money is all hers—she won’t have to give the IRS a cent of it if she waits until retirement to withdraw the money.”

Roth IRAs Are For More Than Just Retirement

Roth IRAs build financial security for more than just retirement. Looking to buy a new house? Rules allow the withdrawal of up to $10,000 per person ($20,000 for a couple) toward the down payment on a house, so long as the account has been open for five years. You can also withdraw money to assist with educational payments, if needed. (Although a 529 savings plan is a better bet for higher education costs.)

With this kind of flexibility and wealth-accumulation potential, Roth IRAs have have come noteworthy benefits. They also earned more contributions in 2011 than any other type of IRA, according to the Employee Benefit Research Institute. Read more here to find out if an IRA may be right for you.

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