Roth IRA stands for a Roth Individual Retirement Account.

FinanceTax

  • Author Frank Vanderlugt
  • Published October 23, 2007
  • Word count 527

In other words, a Roth IRA is a nice little way of saving for the future when you finally put your feet up and stop working after putting a few good long decades of hard slog.

That’s the IRA bit of Roth IRA explained, but what about the Roth bit? Roth comes from the name of the senator who sponsored the legislation, William V Roth Junior.

Now there are retirement funds and retirement funds (and let’s face it, we all need to make contributions to IRAs of some kind of another. No one lives forever and you won’t want to work forever). But there are some things that make Roth IRAs different.

Now the beauty of a Roth IRA is the tax structure. Contributions to a Roth IRA are made from earned income (i.e. income that has already been taxed). As the tax has already been taken out of it, that’s it as far as tax is concerned, more or less.

And because tax has already been paid on the contributions to a Roth IRA, that means that if you make a withdrawal from the Roth IRA, you won’t have to pay tax on it. This, of course is subject to a few limitations.

Now, with a normal IRA, any contributions you make to it are tax deductible. Contributions to a Roth IRA, however, are not.

The advantages of making contributions to a Roth IRA are many. First of all, and this is a big one, you can make withdrawals from your Roth IRA fund at any time.

One of the most useful features of a Roth IRA is that you can withdraw up to $10,000 to buy your first home.

Now there are other features of a Roth IRA that mean that making contributions to a Roth IRA a better idea than if you made contributions to another type of IRA. If you are likely to be in a higher tax bracket after retirement than before retirement (and hey, it happens if you’ve made some smart investments), then a Roth IRA works in your advantage. You’ve already paid that tax at a lower rate before the money went into the Roth IRA, so you won’t have to pay that tax at the higher rate when you withdraw it after retirement.

It’s wise not to make withdrawals from your Roth IRA too frequently when you’re young, as this can incur penalties. However, if you’re making those withdrawals so you can get through tertiary education or if you want to buy that first house, you’ll be OK. But on the whole, it’s better not to touch that Roth IRA – just make contributions to your Roth IRA while you’re working.

The USA is not the only country that has a system like the Roth IRA, although the specific tax laws relating to the contributions to the Roth IRA are unique. New Zealand, for example, passed legislation recently that allowed people to make automatic deductions from their pay packet into a retirement fund which could also be drawn down on earlier to buy a first home.

Frank j Vanderlugt owns and operates http://www.roth-ira-2007.com Roth Ira

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