If you’re thinking about opening an individual retirement account (IRA), the first thing you want to look into is the Roth IRA. Although other retirement account types may be right for some people and circumstances, the Roth IRA is an increasingly popular choice that’s suitable across the board. By learning all about this option, you can determine whether it’s something you’d like to consider further or whether you’d like to then investigate such alternatives as the traditional or SIMPLE IRA.
Here’s what you need to know about the Roth IRA:
1. The Roth IRA was initiated in 1997 through the Taxpayer Relief Act, and its chief sponsor was Delaware’s Senator William Roth – which is where it gets its name.
2. Who is eligible to have a Roth IRA is determined by age and income, as well as other minor qualifying details.
3. The primary difference between a traditional IRA and Roth IRA is that the latter’s funds are not taxed when they’re withdrawn, although taxed sums are deposited.
4. The Roth IRA is best for individuals who expect to make more taxable money later in life; young adults, students, freelancers, career startups and entrepreneurs are among those who are most likely to benefit from this arrangement.
5. You can withdraw your deposited money at any time, or within a reasonable set of guidelines, without penalty – unlike other types of retirement accounts.
6. You can only withdraw your earnings once you are over 59.5 years old and have had your account for five years.
7. However, you can withdraw $10,000 of your earnings tax-free to buy your first home.
8. Earnings are dependent upon the total amount in your account, per your interest rate.
9. You can contribute up to $5,000 a year prior to age 50; after that, you can add $6,000 annually.
10. There is no age at which you’re forced to withdraw your earnings; you can even pass on your Roth IRA to your beneficiaries or spouse.
11. Contribution rates are subject to inflation and may change as you age.
12. You can easily convert your traditional IRA to a Roth IRA, or transfer funds between existing accounts without conversion.
13. You may be able to best take advantage of a Roth IRA by pairing it with other savings plans, such as a savings account, stock market endeavors or a 401K.
14. Your place of employment may match partial contributions to your Roth IRA, so be sure to investigate your options.
15. Another consideration is whether you want to go through a private financial entity or through your own bank, like the Discover Bank Roth IRA. Working with your own affiliated bank can mean lower startup fees, easier access and streamlined communications, since they already have all of your information and records.