A Roth IRA is one of the best types of retirement accounts that you can own. A Roth IRA is not its own type of investment class like a stock, mutual fund, or bonds. Instead, a Roth IRA is a type of tax and accounting classification that you can designate an investment. So, why would you want to establish your mutual fund or brokerage account as a Roth IRA? It is because of the taxes of course! Your contributions to your investment in a Roth IRA type of account is made with after-tax dollars. Your money has already been taxed by the government and withheld by your employer in your paycheck.
That money in your Roth IRA then grows over the course of your working lifetime, and you can then withdraw that money and profits tax free when you retire. You cannot take your earnings out of a Roth IRA until you are 59 1/2 years-old without paying a 10% penalty and taxes on the earnings.
Here are a few key things to keep in mind when you are investing in a Roth IRA.
There Are Contribution Limits
There is a limit to the amount of money that you can invest in a Roth IRA. If you are under the age of 50, you can invest $5,500 per year in a Roth IRA. If you are married, your spouse can do the same. He or she can even invest in a Roth IRA if they have not earned an income as long as one spouse has had an earned income for the year.
If you are over 50 years-old, you can invest more money in a Roth IRA. There are catch up contributions that allow you to plow more money in your Roth IRA account. You can add an extra $1,000 as a catch up contribution to your $5,500 if you are over the age of 50.
Special Times You Can Withdraw
While you cannot withdraw your earnings before you are 59 1/2 years old, there are several exceptions to that rule which allow you to withdraw your contributions and earnings early. You can withdraw from a Roth early because of a disability or the death of the Roth IRA owner.
You can also withdraw the money early using Rule 72(t) for early retirement which require periodic payments to be made over the life expectancy of the IRA owner. You can also use the money to pay for $10,000 of the cost of a first time home purchase or to pay for qualified college expenses.
A Roth IRA Can Be Very Versatile
One of the best aspects of the Roth IRA is that it is a very versatile type of investment asset. You can have not only mutual funds designated as a Roth IRA, but you can also have a self-directed IRA. Most brokerage firms allow you to designate all or a portion of your stock trading account as a Roth IRA as well. You can also have self-directed accounts through an intermediary company where you can even hold real estate, businesses, and other assets in a Roth IRA.
If you’re unsure whether a Roth IRA is the right option for you, consider talking to a financial advisor. An advisor can help you evaluate all of your potential options for saving for retirement and figure out what’s best for your situation. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Hank Coleman is a finance writer, financial planner, and self-proclaimed investing junkie. He has a Masters Degree in Finance and a Graduate Certificate in Financial Planning. Be sure to follow him on Twitter @MoneyQandA and on Facebook.