Roth IRA Explained

Alright, here goes, Roth IRA Explained! Everything you need to know to start and successfully manage a Roth IRA.

1. It’s an investment account. Your Roth IRA is a tax-advantaged investment vehicle. View it like you would a bank account, except just a bit stricter, more rules.

2. Earn more interest. You know how when you have a savings account at a bank, they pay you like 2-3% per year interest? This figure fluctuates with the current state of the markets, but in general, it’s pretty low. Between like 1-6% per year.

In a Roth IRA Explained, you can hold conservative investments like that if you want, or you can buy stocks. Stocks are investments that can fluctuate pretty dramatically in value in a short period of time.

What’s that mean?

It means that you can earn (or lose) a pretty significant portion of your investment in a short period of time. For instance, if you would have bought Bank of America stock in early March of 2009 at like $4 and then sold it a few weeks later for like $10, you could have gracefully doubled your money in less than a year.

How’s that compared to 3%?

Of course, on the downside, if you would have bought Bank of America late 2008 for $40 and then sold it in March 2009 for $4, you would have lost your shirt!

3. Keep the taxes. One thing that separates a Roth IRA Explained from almost all other investments is the tax treatment. The tax treatment in a Roth IRA is spectacular.

You pay taxes on the front end. So you get paid by your job, they take the taxes out, you use that after-tax money and put it in your Roth. Then you’re able to invest to your heart’s desire, and when you take the money out at the end, there are no taxes assessed. None. Seriously.

4. You can’t just take it out whenever you want. Distributions from a Roth IRA, that is, taking money out of it, can trigger penalties. In general, whatever amount of money you put into it, you can take out of it at any time, with no questions asked.

But your earnings (or profits) from the Roth IRA Explained must remain in the account until you reach the retirement age of 59 and-a-half. If you take your profits out before then, they may be subject to an IRS penalty.

For more detailed information, ask your tax advisor or read IRS Publication 590.

That’s about it. Those are the basics of a Roth IRA. Find more articles below that other users have found interesting.

How much can I contribute to a Roth IRA?

Traditional IRA vs. Roth IRA – teach me the difference

Roth IRA Distributions – give me more detail

Can I roll my 401k into a Roth IRA?

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