A Roth IRA is just one of the many investment accounts that make up the alphabet soup of abbreviations that create the landscape of financial retirement products. Roth was the Congressman who put through the legislation to establish these accounts. IRA stands for Individual Retirement Account, of which there are a handful of kinds, though basically they boil down to these two: 1. Traditional IRA and 2. Roth IRA. In a changing arena where individuals are having to captain their own financial ship to navigate through to retirement, it is important to know the nuances of the water ways.
For many former employees who are finding themselves in charge of their own shop, business, or contract life, the Roth will become one vehicle that many can successfully rely upon. Even individuals who have an employer may need the flexibility and freedom to make their own investing decisions and may choose to open Roth IRA in addition to other types of retirement accounts for this reason. It generally offers broader parameters, such as the ability to choose individual equities and mutual funds rather than canned and limited investment choices offered in employer-sponsored programs. Comfortably invest post-tax money into a Roth IRA for withdrawal later without the hefty withdrawal penalties that other individuals face when dealing with the Traditional IRA or a 401(k).
Know Qualified Distributions
Many who focus on employer-sponsored accounts or Traditional retirement accounts anticipate and make the financial assumption that their tax bracket will actually be lower as a retired person. While many people’s income (and taxation rate) does increase into their older working years, no one knows what the tax rate will be at their age of retirement. There could be an instance in which someone is at a higher tax bracket in retirement because they maximized retirement contributions while surviving on meager earnings during their working years.
A Roth IRA is built with post-tax money, which means tax issues are already settled prior to investing the funds. With the Roth, there is no tax on anything except actual earnings that accrue in addition to the initial investment in a Roth account. Tax-free distributions, called qualified distributions, occur in some cases, after five years of having the account in place. They can include rather unfortunate circumstances, such as your own death (and transfer of the funds to your beneficiaries), or your own disability. Happier reasons to receive qualified distributions can include reaching the right age (determined by the Federal rules) and for first-time home buyers.
Shop Wisely to Avoid Fees
Locate the banks or financial institutions that have the lowest administrative fees and trade fees. If you are going to deposit money into your Roth and leave investing up to the professionals, then transaction fees are a moot point. Fees for a Roth can be charged for trades and transactions based upon the dollar amount or number of shares that you are planning on buying or selling. Though, watch out mostly for the custodial fees on the Roth IRA available accounts.
Revisiting Alphabet Soup
The 401(k) is a retirement account larger companies offer to employees. An employee designates how much pre-tax income is invested on their behalf. Companies typically chip into their employees’ accounts, or match funds dollar-for-dollar up to a maximum annual amount. Investment funds are limited to the individual company’s 401(k) for employees. This can be disheartening for stock-picking stars, who will not necessarily be allowed to buy individual stocks, bonds, or mutual funds that they desire. If laid off, depending upon how long a company requires for employees to be vested, individuals may lose the match (or get to take most or all of it) to a Rollover IRA.
A Traditional IRA is popular with a 401(k) because it allows pre-tax pay to amalgamate retirement accounts. Retirement accounts limit how much money an individual can invest into retirement accounts. One way around this is to have separate accounts, such as a Traditional and also a Roth IRA. A Traditional IRA works a lot like the 401(k) because contributions are tax-deductible, occur pre-tax, and are taxed once withdrawals are made in retirement. Early withdrawal will incur taxes and withdrawal fees.
A Roth IRA can work well with other retirement accounts or fully on its own. It has advantages that are unique, such as applying post-tax money to invest in retirement. Enjoy investment flexibility if you are a strong individual investor. And, retain access to your money over your lifetime, especially if you have a qualified distribution circumstance arise.
Complex Investments Made Simple