The Basics of a Roth IRA

May 7th 2016

Roth IRA and Taxation

There are two types of IRAs: traditional and Roth. While money invested in a traditional IRA receives an upfront tax break, capital gains taxes must be paid at the time of distribution.

This isn't the case with a Roth IRA. Qualifying Roth IRA contributions do not receive an initial tax break, but when the times comes to withdrawal at retirement, there are no taxes owed to the government. However, there may be tax liability for any money withdrawn early from the account.

No Age Restriction

In traditional IRAs, a saver has until the age of 70 1/2 before distribution of the money. That is the latest the money can be left in the account without distribution and taxation. There is no such restriction with a Roth IRA. The money continues to sit in the account and accrue compounded interest as long as the account holder wants.

Roth IRA Eligibility

There are income restrictions on Roth IRAs that limit who can have them and how much a person can contribute. The actual income amounts and contribution limits typically change from year to year, although as of 2014, most American families making a median income of roughly $50,000 can contribute fully to a Roth IRA. Those who make more than the income limit in a given tax season may be able to make a partial contribution.

Conclusion

Saving money for retirement is a pivotal consideration for a number of people actively in the workforce, but with so many options available, it's easy to get confused. Among the most popular options for workers is a Roth individual retirement account, which offers several benefits to those who qualify.

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