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Categories: Retirement
What is a ROTH IRA?
I have been reading about it, but i am not sure what it is acactly does anyone know? Thanks!
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jboynton
at 05:08pm on Nov 13, 2007
A Roth IRA is a version of a traditional IRA (Individual Retirement Account). A Roth is a retirement account with a terrific tax incentive. Essentially, this is a savings account backed by funds that are managed to achieve more interest than a regular savings account. Most savings accounts get between 1-2%; whereas a Roth has been able to get between 8-40%, although, it should be known there are no gaurantees. In addition; a Roth’s savings are strictly used for retirement (after age 59.5) or a 10% tax penalty is issued, plus withdrawals are additionally taxed as ordinary income (exceptions include an allowance for first time home purchase or withdrawals in the need of a disability). However, if money is taken out after 59.5, all deductions are recieved tax free. This means that any contributions to this account over the years grow at high rates and accumulate without any tax consequences.
Most financial professionals will use the following story to describe the benefits of a Roth IRA: If an individual, age 25, made a $2,000 contribution to a Roth every year until he/she was 35, at which point he/she stopped… by the time he/she was 60, based on normal compounding interest rates, the account would be worth between $500,000 and 1 million dollars. Now imagine if contributions were either higher per year or contributions extended throughout one’s lifetime. $10 thousand dollars can be turned into $500 thousand for one’s retirement. Such is the power of a Roth.
There are other key features to a Roth, but this is basically what one needs to know to understand how this investment vehicle works.
smalps
at 03:25pm on Nov 15, 2007
You are allowed to withdraw money for first time home purchase, if it is your principle residence. I know for Etrade’s ROTH IRA you can only take it out for first time home buying after 5 years. Is this the standard rule for all ROTH IRA’s or is that just with Etrade? I have a IRA with American Funds. Do you know what their policy is for withdraw for first time home buying?
jboynton
at 03:31pm on Dec 12, 2007
The securities industry regulation for all Roth IRA’s is that one can use $10,000 of their retirement savings for first time home purchase after the account has been active for five years. This is the case with American Funds and any other Roth IRA. American Funds is a fine mutual fund company. Roth IRA’s are built on the funds offered by such companies. American Funds has a history of consistent growth performance.