Saving and investing correctly for retirement is an important thing, as it can mean the difference between a comfortable retirement and no retirement at all. Of all of your choices for retirement funds, the Roth IRA is one of the best ways to maximize your retirement savings while reducing taxes.
If you have been wondering, how does a Roth IRA work?, you may be surprised by the benefits associated with investing in this type of fund. In a Roth IRA, you pay ordinary income tax on funds contributed to the account, and then your investments grow tax-free for the life of the account.
If you already have a retirement fund, whether it is an employer sponsored 401k, or a traditional IRA, you can rollover your accounts to a Roth IRA in order to realize the tax benefits from this type of fund. You can also own a Roth IRA in addition to another retirement fund, although there are income and contribution limits set by the IRS.
How Does A Roth IRA Work, And How To Know If It Is Right For You
Roth IRAs make money in the same way a traditional IRA does. Funds in a Roth IRA can be invested across may asset classes including stocks, bonds, CDs, mutual funds, and investment properties. The major difference is that in a traditional IRA, you pay taxes when the money is withdrawn, and in a Roth IRA taxes are paid on deposits.
A traditional IRA allows you to deduct the funds contributed to the account on the current year’s taxes, allowing for an immediate tax benefit, while the tax benefits to investing in a Roth IRA are realized at the time of withdrawal. While the tax benefit of a traditional IRA is advantageous immediately, if you are investing over a long period of time, and expect to make large gains, the Roth IRA is your best option.
You can utilize various Roth IRA calculators to find out if this tax-advantaged account is right for you and your situation. You can compare the gains you could make in a traditional IRA versus a Roth IRA by entering your age, available capital, as well as your time frame for investing. There are also many tools offered by online brokerages such as ETrade that can assist you in determining which retirement account is best for you.
No tool or calculator can replace the research needed to successfully invest for retirement. You must always take into account your investment style, risk-tolerance, and investment objectives before committing any capital to a retirement fund.
How Does A Roth IRA Work, And What Are The Limits On Contributions?
Your adjusted gross income determines your yearly contribution limits. While this figure has changed over the years, as of 2010 the income limits on contributions to a Roth IRA are $105,000 for an individual filing and $167,000 for married couples who file jointly.
As of 2010, the maximum yearly contribution allowed is $5,000 for investors under the age of 50, and $6,000 for investors over 60 year of age. The IRS offers incentives for late retirement investors, and Roth IRAs offer tax-free withdrawals of original contributions after a five year “seasoning” period, provided additional criteria has been met.
For long-term retirement investing, it is hard to beat a Roth IRA for the tax benefits. This is especially true if you expect to be in a higher tax bracket when you retire. While Roth IRAs are excellent retirement vehicles, they are not right for every situation. Carefully weigh both your current and future financial situation before investing.