Roth IRA For Dummies

Do you need an explanation of a Roth IRA for dummies?

Hey, don’t be so hard on yourself. You’re no dummy. The fact that you’re looking for information on Roth IRAs automatically makes you smart.

Click here if you would like a quick refresher on exactly what an “IRA” is

So how does it work?

Roth IRAs are the coolest thing since sliced bread. With regard to investing for young people, they’re usually the best option.

They work just like savings accounts. That is, you get money from your job or business, and stash it away in your Roth. Any amount that you put in is called a contribution. You can remove your contributions at any time without incurring taxes or penalties.

Once you make the contributions, your account is funded, and you start using your contributions to purchase investments. Just an FYI, there are a million-and-one investments to choose from.

Worry not, friend, included in our explanation of a Roth IRA for dummies is help selecting good stocks to invest in (new window).

Assuming you follow our rules and make good choices, your account will begin growing. Anything that you have in your Roth IRA that isn’t a contribution, is earnings. The earnings must stay in your Roth IRA until you’re 59 1/2 or you get taxed and penalized. Like all rules, there are some exceptions.

  • Let’s say you put $4,000 in your Roth in 2007.
  • You made good choices and by 2008 you had $5,000.
  • Your Roth now consists of
    • $4,000 in contributions (which you can take out whenever with no penalty) and
    • $1,000 in earnings (which you can’t take out until you retire or meet one of the exceptions)

You can take out any amount less than $4,000 without taxes or penalties. But if you take out $4,100, you have to pay taxes and penalties on the $100 of earnings.

Roth IRA for Dummies (Cont.)

Opening a Roth IRA

You can open a Roth IRA at a bank (Bank of America, Citibank, Wachovia, etc), a broker (Charles Shwab, Fidelity, Scottrade), and through other types of institutions, like insurance companies.

I use a new broker called The reason is because it’s cheap to maintain it there (I think it’s like a $30/year fee), and I can buy and sell stocks cheaply and quickly. Also, they have a bunch of free research and other tools on their site that I use.

One thing that’s not good about them is that they’re only online. That means if I want to speak with somebody in person, like face-to-face, I’m not able to. I guess life’s a series of trade-offs, huh?

It’s easy to open. You just

  • fill out some forms online,
  • print them,
  • sign them,
  • fax them,
  • and mail them.
  • Once they receive the papers, they open the Roth.
  • Then you fund it. You can
    • send a check,
    • wire money,
    • transfer it from a bank account, or
    • transfer it from another type of account that you may have.

Once it’s funded, you choose your investments, and you’re off. And there you have it, the end of opening a Roth IRA for dummies. But you’re no dummy! For more details, visit the IRA Center.

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