What is a Roth IRA?

The choice of mutual funds and investment opportunities available that you can out your money in is mind boggling. There are literally hundreds of funds, all with different goals and different amounts of risk. One of the most well known and popular investment choices is known as the Roth IRA. But what is it and how do you invest in it?

The Roth IRA is a retirement account that uses stocks, mutual funds and securities to help people earn money for their retirement. They are open to invest in, but there are guidelines that you would have to meet that are set by the Internal Revenue Service.

One of the major plusses to having a Roth IRA is the way the taxes involved with the account work. When people deposit money into their Roth IRA, it is from money that has already been taxed, usually from income earned, and when you need to take money out, anything up to the amount that was contributed, is tax free. If you need to take out more money than you put in (money that was earned in the IRA), it is tax free in most situations.

If you chose to use a regular IRA, there is no guarantee that the money you deposit into the account will be tax deductible (some of it is, some of it isn’t, it depends), and when you choose to take money out, it will be taxed. An additional bonus to a Roth IRA over a normal one is that there are fewer barriers stopping you from taking the money out of the account once you’ve put it in.

The biggest negative to using a Roth IRA to help with retirement is that the money you contribute into your account is not tax deductible. Another downside to the Roth IRA is that there can be major penalties associated with withdrawing your earnings too early. There are, however, many, many exceptions to these penalties, like buying a home for the first time, or withdrawing money to pay for college or even your children’s college expenses.

Overall, a Roth IRA is a fantastic choice for those looking to retire and shield a vast majority of their retirement savings from taxes. While there are fees for early withdrawal, the benefits of the Roth IRA far outweigh the potential costs as seen by the soaring popularity of this investment choice.

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