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What's a Roth IRA?

Retirement Account Focus, Part II


You already know the importance of investing in a 401(k) if your employer offers one, but what if that's not an option for you or you've already invested as much as your company will match? This is where an individual retirement account (IRA) comes in to play and there are two types: Roth IRA and Traditional IRA. Tax structure is the biggest difference between the two options.

If you're already participating in a tax deferred retirement plan (like a 401(k)) and your salary meets the income limitations for Roth IRAs, start investing while your salary is low enough to get in. If you're filing your taxes as single you can't earn over $95,000, and if you file jointly your income can't exceed $150,000. To learn what's so great about Roth IRAs just read more

The Roth IRA allows earned income that’s already been taxed to grow tax-free. Contributions to Roth IRAs are not tax deductible when they are made, but distributions made during retirement years are tax free. The principle (your original contributions) can also be withdrawn at any time without penalty, but earnings can't be withdrawn until age 59 1/2 without penalty.

Besides the tax free withdrawals that make a Roth IRA so attractive, another advantage is the absence of minimum withdrawal requirements. Traditional IRAs require that you make minimum withdrawals starting at age 70 1/2 whether or not you need the money, while the Roth doesn't come with this caveat.

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