You have probably heard a ton about Roth IRAs in the news recently due to how popular they’re becoming. However, if you don’t know much about them that’s OK, it’s easy to learn what is a Roth IRA and the reasons for getting one.
The Roth Individual Retirement Arrangement (or account to some) is one of the most popular retirement savings plans in the United States. This article will cover some of the most important points about the Roth IRA and its history.
What is a Roth IRA?
IRAs were created in 1974, but it was not until 23 years later when the Taxpayer Relief Act of 1997 was passed that Roth IRAs came into existence. William Victor Roth Jr., a Delaware U.S. Senator and lawyer, was the lead sponsor for this act, and so the Roth IRA was fittingly named after him.
The Roth IRA was created in order to allow taxpaying citizens to have more flexibility with their retirement funds. This type of savings account allows several advantages that other IRAs do not that could have extremely positive expectations for your money.
A Roth IRA operates the way most retirement arrangements do, in that it is simply an account that consists of different types of investments. These investments can be in securities, stocks, or bonds; owners can use mutual funds if desired.
Differences between Other Retirement Accounts
Typically the comparisons are made between Roth IRAs and Traditional IRAs to answer the question what is a Roth IRA. While they share a lot of similarities, the differences make a significant impact to the effect each IRA can have for your savings.
Traditional IRAs are the ones that most people are at least a bit familiar with. You get your income and are able to contribute a part(based on your Roth IRA contribution limits) of that to your Traditional IRA, this amount grows over time and then when you reach certain conditions and start to withdraw money you pay tax on it.
A Roth IRA is almost the polar opposite of a Traditional IRA in that you pay almost all of your taxes up front. You pay income taxes on your gross income, and only then can you contribute to your investment account. However, when you withdraw this money there are only rare specific cases where you have to pay taxes or penalties, otherwise it will be tax-free, including the earnings that have accumulated.
Final Thoughts on What is a Roth IRA
There are some restrictions on the money in a Roth IRA, but compared to a Traditional IRA it is much more flexible in regards to withdrawals. You can take out any part of your original contributions whenever you want with no penalty or fee, and there are benefits to help you take out some earnings tax free as well like when you are buying a home. Please refer to our article on the ‘Benefits of Roth IRAs’ for detailed information on other benefits. I hope this article has cleared up any issues you had on what is a Roth IRA, if not check out our other articles for more detailed analysis.