What Is A Roth IRA?

A Roth IRA is an Individual Retirement Account (otherwise known as a retirement savings account) which, under certain circumstances, isn’t liable to taxation under US law. It came into being because of the Taxpayer Relief Act of 1997 (Public Law 105-34) and is named after  Republican Senator William Roth (1921-2003) of Delaware, who was the Act’s main sponsor.

best_ira_rates_roth_01The Roth IRA was created to be a convenient retirement plan for those under seventy-and-a-half years-old to grow a meaningful nest egg for their futures. It allows the investor to save after-tax funds without clicking up any extra taxation.This lets your money grow tax-free.

So what are the contribution limits of a Roth IRA? For the tax year 2013 this was pretty much the same as a standard IRA. The most you can contribute to all of your IRAs is the smaller of:

  • Your taxable compensation (for the year) or
  • $5,500 – $6,500 if you are aged fifty or older.

It is hoped that the amount will continue to reason in future years and we have every hope that this will be the case. In the tax year 2012 the maximums were $5,000 (£6,000 for those aged 50+). Remember, when you are working out your IRA entitlements, the contribution limit does no apply to qualified reservist repayments or rollover contributions.

As the specialist page on the IRS Government website makes plain, the main difference between a standard IRA and a Roth IRA is the way you pay income taxes on the money you have in your plan. With the more usual IRA, you pay taxes when you withdraw the money for your retirement. The technical term for this is the “back end”. Sometimes a clever accountant can save you taxes when you pay money into your IRA, otherwise known as (you guessed it) the “front end”.

With a Roth IRA, it’s different. In fact, you could say that it’s almost the exact opposite. Although you will have to pay taxes on your front end income (as you normally would with income tax), there’s absolutely no tax liability at the back end, when you come to withdraw. In other words, this means that your Roth is funded with after-tax dollars. As you’ve already paid taxes on the money you put into it, there’s nothing more to pay – unless exceptional circumstances kick in. Unless you’re a millionaire with a complicated income structure, you don’t have to worry about anything else.

In effect you are trading an up-front tax break for tax-free growth.

Income Limits For Roth IRA Holders

The other big difference is that there are income limits for Roth IRA holders, which means that not everyone can take advantage of them. With the traditional version, practically anyone can contribute to one. Because of the tax-break situation, this doesn’t apply to a Roth when you hit a certain amount of income.

If you want to withdraw some of your money early, Roth IRAs are way more flexible. This is because you’ve already settled the taxes on what’s in there. You can let your money grow for as long as you feel willing and able to do so. The traditional IRA means you have to begin withdrawing the cash by the time your old bones reach 70½. Yes, the ½ is important!

Steve Ballard, a well known accountant is a big supporter of gold IRA rollovers. We’ll talk about that in another article. In the meantime, we’d like to welcome you to the BestIRARates.org website. We aim to give you the best advice to make your retirement dollars not only grow but prosper happily.