Individual retirement accounts or IRAs are a great way to prepare yourself financially for retirement life if you live in the USA. A ROTH IRA is a type of retirement account that allows individuals to contribute non-taxable contributions, as well as tax-free withdrawals if all the required conditions are met.
This type of IRA is named ROTH IRA because it was named after its founder William Roth who founded this type of retirement account in 1997 during his tenure as a Senator in Delaware. ROTH IRAs are similar to the traditional IRA but there are some slight differences.
If you open a Roth IRA, you will be required to fund it with after-tax money. In other words, you will fund the account with money that has already been taxed, and so the contributions to the account should not be taxed again, otherwise, it would be double taxation. It also means that the deductions made to the account will not be taxed.
Unlike the Roth IRAs, traditional IRAs are funded using funds that have not been taxed. Your contributions are therefore subject to tax deductions and your withdrawals are also subject to income tax deductions when you retire. This means that the traditional IRAs are taxed twice.
The double taxes in the traditional IRA makes the Roth IRA the more appealing type of retirement savings account. It is the best option for anyone who feels that their tax obligations might be higher when they retire.
Caveats to the Roth IRA account type
Judging by its superior advantages over a traditional IRA, there is no incentive for people to use a traditional IRA. However, some limitations prevent this from happening and they have to do with the amount of income that one makes. For example, individuals that earn over $139,000 annually cannot open a Roth IRA account. The same applies to couples that jointly earn over $206,000. Annually.
The periodic amount that individuals can contribute to their Roth IRA is $6,000. However, the limit increases slightly to $7,000 for individuals over 50 years old. You can open a Roth IRA with an institution that has been approved by the IRA. Such institutions may include brokerage firms, banks, and credit unions among others.