What is a Roth IRA?

mitsy

June 18, 20050 found this helpful

A Roth IRA may or may not be your best bet. You need some good financial advice from a professional. Your bank will probably have an investment advisor. Make an appointment and get some advice and education and get started on a retirement plan before it's too late. Put away NOW as much as you can, both into and IRA and into any other plan you are eligible for.

With a Roth IRA, you deposit money from your paycheck (after taxes) and when you are ready to retire, you can withdraw the money tax free. Also, the earnings are tax free. You can choose which funds to invest in within the IRA. The IRA is the shell, and you choose mutual funds, index funds, etc. to go inside. Your money is invested in the funds. I started a Roth IRA about a year ago with Vanguard at their website, www.vanguard.com. You can set up the whole thing online and even make transfers from your bank online. The minimum initial investment for most funds is $1000. I think ing.com has a no-minimum IRA, but I'm not sure. I did not know much about the different types of funds, so I invested in the "Target 2045" which is a mutual fund that a Vanguard employee manages, by buying and selling stocks, to meet the needs of a person who will retire around the year 2045. I guess there are different strategies for buying and selling stocks depending on how long you are investing your money, but since I don't understand them all, I chose a fund that would be managed for me.

The other type of IRA is called a Traditional IRA, and with this kind, you don't pay taxes on the money you put in, but you do pay taxes on the money you take out and any earnings. Some employers allow you to take money out of your paycheck before it is taxed to put into a company IRA plan; or, when you fill out your income tax forms each year, you get a deduction based on what money you put into your Traditional IRA. Both types have a limit to how much money you can put in per year, I think.

This is about as much as I know. I think it is accurate and I hope it helps. I learned this from several books I checked out at the library. Those "for Dummies" books are great!

I just thought of something I should have mentioned in my previous post-- I did not hire a professional to educate me and guide me in what to do. Instead, I made the most of my tax dollars and went to the public library and read SEVERAL books.

If you go to your search engine and type in roth ira definitions, you will find quite a good array of sites that will explain all the rules and help you to figure out if it's right for you or not ...

Whether a Roth IRA is safe or not depends on what you are investing in. You can invest in almost anything you want: stocks, bonds, mutual funds, money market accounts, whatever. By opening these investments within a Roth IRA account, you get the Roth IRA benefits which are not paying taxes once you invest the money.

Normally, you pay income tax, then invest the money, then pay taxes on the interest, earnings, dividends, or capital gains (basically, whatever extra money you earn besides what you paid in yourself). Using a Roth IRA, you don't pay taxes on this. Since tax rates are bound to go up in the next few decades, that could be especially good.

The usual alternative is a regular IRA where you would not pay income taxes on the money you use to pay for the investments. It either comes out of your paycheck before taxes are calculated or you get a refund on your taxes. This allows you to set more aside than you could normally afford. For example, if you can afford to save $100 per month, you could invest more than $100 per month in a regular IRA and still only lose $100 from your paycheck. Then you pay taxes on all the money you withdraw, during the year you withdraw it, as if it were a paycheck.

If you think your tax rate will be higher when you withdraw the funds, you should use the Roth IRA. (That's what I'm using because I think that I will always be in a low tax bracket, but that taxes will go up.) If you think your tax rate will be lower, you should use the regular IRA. (This is what many people with high incomes do who think they will need less money when they retire because their house will be paid off and they will not need to save for retirement or buy professional clothes, etc.)

The way to invest in a Roth IRA is to first decide how you want to invest. Then contact the bank, broker, or mutual fund you want to use and ask them whether you can open an IRA account through them. If you can (and you probably can), they can tell you the procedure.

There is a limit to how much you may invest. (I believe your limit will be $5,000 because you are getting close to a typical retirement age; mine is $4000 because I am only close to an atypical retirement age!)

Note that if your company has a retirement plan (such as a 401K), you are allowed to invest even more there, if you can afford to. Also, if your company has a retirement plan, it may "match" some of your funds--if they do that and they have investment options that don't scare you, that might be a better idea than a Roth IRA because you get free money from them.

Besides the library, I also recommend Vanguard for good online information in their Planning and Education section. See also the Motley Fool (www.fool.com) - silly people with serious information for people at all levels.

Good luck!

How do you figure out which of the investment options through a roth IRA are FDIC insured? Basically, how do I make sure that the principal that I contributed is safe.