What is a Roth IRA?

IRA, Retirement & Investing
on June 9, 2012

Saving for retirement can be a challenge. It’s hard enough just to pay the bills and put groceries on the table, much less put hundreds of dollars away every month for retirement. Although it may seem difficult, it is to your advantage to start saving as early as possible if you don’t want to be eating Ramen noodles every day and living with your kids during your twilight years.

When it comes to saving for your retirement, there are plenty of different retirement account options that you can choose. One of the best account types out there is the Roth IRA. What exactly is this Roth IRA and why would you ever think about putting your hard-earned money into one?

How it Works

The simple answer to why you would consider putting your money into a Roth IRA is because it can save you a lot of money on taxes. When you put money into a Roth IRA, you do so on an after-tax basis. This means that you earn money at your job, pay taxes on that money, and then you choose to put some of what you have left into your retirement account. This may not seem like an attractive option at first, but it gets better.

After that, you invest the money into securities like stocks, bonds, mutual funds, and ETF’s. Any money that you earn from your investments grows in the account tax-free. This allows your investment to compound again and again.

Once you hit retirement, you can start taking the money out of the Roth IRA. The best part: the money is not taxable. All of the money that you take out of your Roth IRA during retirement is tax-free. This means that all of the money that you made on investments was never taxed by the government. With the traditional IRA, you’d be paying taxes on the money that you take out.

If you’ve paid any attention to current events, you know that the national deficit is getting pretty big. If the government ever hopes to be able to pay off this debt, it will inevitably have to raise taxes on the public. You have no idea how high tax rates could be by the time you retire. If you have a Roth IRA, you won’t have to worry about it, because you’ll be living tax-free.


Although the Roth IRA is definitely a pretty sweet deal, not everyone can participate in one. If you want to be able to contribute, you have to meet some income limits. If you’re single, you have to make less than $110,000 per year to make a full contribution. If you’re married, you have to make less than $173,000 to contribute fully. If you make slightly more than those numbers, you can make a partial contribution, up to a certain amount.

Overall, the Roth IRA is one of the best types of retirement accounts that you could choose. If you’re ready to start working toward a more comfortable retirement, open a Roth IRA today and start saving.

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