What is a Roth IRA? Many people eager to avoid retirement shock often ask this question. And though it may sound complicated, a Roth IRA is a simple retirement savings account which allows you to build a substantial nest egg without having to worry about taxes. This is because the contributions you make to this savings account have already been taxed as part of your income for the year. Once taxed, the money in your account is free to earn and grow. When you reach the age 59 1/2 years of age, you can start taking out withdrawals and never have to pay a dime to Uncle Sam again.
It is possible to create and take advantage of a Roth IRA, either by yourself, or with your husband or wife.
If you go the individual route, you are allowed to put away anywhere up to five thousand dollars every year provided your earnings don't go beyond $101,000. Should your income go over that sum, but remains under $116,000, you can still maintain a Roth, though the maximum contribution amount will probably be lowered pursuant to your income.
If you're married, but have no desire to carry the responsibility of the entire $5000 by yourself, you and your spouse can add equal amounts to the savings account, as long as your entire combined income does not top $156,000.
In the event this combined income surpasses $156,000, but is under $166,000, you are still allowed to participate together. However the maximum amount will be lowered in accordance with your combined earning level.
What is a Roth IRA but a sound financial vehicle that makes it possible for you to earn profits from your IRA investments which will never be subject to taxes.
Sounds unbelievable, doesn't it? But, these tax savings are one of the primary reasons for setting up a Roth.
In truth, any IRA, traditional or Roth, offers a tax deduction. However, with traditional IRAs your annual contributions are not included in your taxable income for that year.
In other words, your contributions are not taxed...that is not until you reach the age of 70 1/2, when the government requires you to starting taking minimum distributions (withdrawals). At that time you will be required to pay taxes, not only on contributions, but on any earnings you've accumulated.
In answering the question, "what is a Roth IRA," it should be pointed out that the minimum distribution requirement associated with a traditional retirement account, DOES NOT apply to a Roth. This means that if you are supporting yourself through other means, and you reach seventy and a half years of age, the funds in your Roth can stay right where they are and go on earning tax-free profits.
And as they say in those obnoxious infomercials, "BUT WAIT...THERE'S MORE!"
Under certain circumstances, if you are the owner of a Roth IRA, it is possible to take early (i.e., before reaching 59 1/2 years of age), tax-free distributions. The only stipulation, besides these special conditions, is that you must have owned this savings plan for at least five years.
The qualifying conditions include disability, having non-reimbursed medical costs, covering medical insurance premiums if collecting unemployment, first-time residence purchase, as well as, eligible education costs.
Every one of these answers to the question, what is a Roth IRA, makes it clear that the benefits of using this account to build wealth for retirement are just too good to pass up.
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