IRA Basics – What is a Roth IRA?

An IRA is an Individual Retirement Account, which is an account that is geared toward saving for retirement that allows tax free contributions or tax deferral. Although there are a variety of different IRAs that are suited for different financial goals, the most common types of IRAs are the Traditional IRA and the Roth IRA.

Roth IRAs provide greater flexibility than Traditional IRAs. In a Roth IRA, the contributions to the account are not tax deductible. However, once the money is in the account, it is not subject to any taxation or penalties upon withdrawal except for any interest that is earned on the money. Even then, earnings can be safely withdrawn after five years. Both the Traditional IRA and the Roth IRA enjoy the same benefits when it comes to withdrawing money to pay for housing or approved higher educational costs.

Although a Traditional IRA forces you to start taking distributions when you reach age 70 ½, Roth IRAs allow you to forgo taking distributions and continue making contributions for as long as you choose. Roth IRAs also allow you to invest in whatever you want and you can have a Roth IRA in addition to any other retirement plan, such as a 401(k). For these reasons, Roth IRAs are often chosen by those who want to have greater flexibility and control over their money. Because of the fact that money can be withdrawn more freely and with less severe penalties for early withdrawal, Roth IRAs are ideal for families that may have unforeseen changes in expenses.

Where will your money come from in retirement? (Image: Flickr)