What You Need to Know About a Roth IRA

Everyone ought to be putting some money aside to save or to grow. Many people retire with little or no money nowadays. Unfortunately, that is why there are so many people working at the local supermarket that are 60 or older. So, it's critical to start setting some money aside to grow by accruing interest or some form of earnings. There are many different ways to accomplish this. Individual Retirement Accounts (IRA) are one specific type of account that are useful as longer term retirement plans. Roth IRA's are one popular type of IRA. But before opening an account like this at the bank, there are some important things that one should know.

Roth IRA's must be set up by an IRS approved institution, such as, a bank, credit union, or brokerage. They can be established at any time during the year. A Roth IRA is basically an individual savings plan. It accrues earnings on a tax-free basis. However, contributions made to it are not a tax write off like they are on traditional IRA's. These contributions can be made up to a certain limit. If an individual has more than one Roth IRA account, it will be treated as one account.

Here are some of the advantages of a Roth IRA. One advantage is that as long as the individual or spouse of the individual has earned income or compensation that is taxable, they can open a Roth IRA. Another advantage is that contributions can be made to it even after age 70 1/2, unlike traditional IRA's. In addition, individuals that are eligible can contribute money to the account up to a certain limit. Also, the eligibility of a contribution is not restricted if one is active in an employer retirement plan. And if a withdrawal is made after a 5 year wait, then, the individual can withdraw tax-free if they are buying a home for the first time, withdrawing due to disability or death, or are older than 59 ½.

The disadvantages are that premature withdrawals that are more than the contributions are fully taxable, and they can be subject to a 10% fee. Furthermore, the contributions are limited to each individual. It is usually around $4000-$8000, depending on how long and when the account was started. Another disadvantage is if the income of the account holder reaches a certain level, one can "phase out" of being eligible to contribute to the Roth IRA, or the contribution amount will be reduced. It is best to consult with the bank or financial advisor who is in charge of the account to help with those numbers.

Every type of savings, retirement, and investment account will have its pros and cons. The purpose of this article was to provide the basics of what one needs to know if they are interested in setting up some type of retirement account. Consult a banker or financial advisor for more information and to see if the account would be beneficial.