What is Roth Individual Retirement Account or simply Roth IRA?

As discussed earlier, an IRA or an Individual Retirement account is a personal savings plan that provides income tax advantages to individuals saving money for purposes of retirement. However, IRAs comprise a special class of retirement accounts in the United States which give varying tax benefits depending on the type of IRA chosen. And one of the common choices is the Roth IRA.

Roth IRA is the brainchild of Senator William Roth (R-DE), a fiscal conservative involved in a number of tax-related bills. Since its creation in 1977, Roth IRA has become very popular amongst diverse groups of people, and it is one of the most commonly recommended investment strategies for middle-class Americans.

This type of IRA can be invested in a range of gaining strategies, including mutual funds and traditional stocks. When money is first invested in a Roth IRA, it is federally taxed based on the tax bracket one currently inhabits, something that may be a downside for some when compared to a traditional IRA. When money is taken out of the Roth IRA, however, funds up to the amount put into it are always federal-tax free, and often the entirety of the funds are free from federal taxes.

There are also penalties associated with Roth IRA and withdrawing money early. By withdrawing before retirement, one may incur both federal taxation and a 10% direct penalty. Luckily, these penalties are not always triggered, as there are exemptions for cases such as purchasing a house or paying for college. There is never a penalty for withdrawing money up to the amount one has put into the account, penalties are only ever incurred when drawing on earnings.

The Roth IRA is particularly recommended for people who are currently in a relatively low tax bracket and anticipate retiring in a higher bracket. By paying taxes while in a low bracket, say 15%, such people can avoid potentially much higher taxes at their age of retirement if their income level increases sufficiently to knock them up into a higher bracket, say 40%. With a traditional IRA, the entirety of their earnings -- even those they put away while in a 15% bracket -- will be taxed at 40% if that is the bracket they are in when they cash out their IRA. With a Roth IRA, however, they pay taxes based on their current bracket at each investment interval, potentially saving enormous amounts of money by the time they retire. High-level corporate execs need not apply for this type of IRA.

In order to take full advantage of a Roth IRA, one's income must be within a specific range, based on marital status. Once income drops below that level, the amount a person may contribute to their Roth IRA drops, and once income rises above an upper cap, they are no longer allowed to put money into a Roth IRA at all.

So, if you are planning to retire think of this retirement account and also read my posts on Ten Steps for Retirement Preparedness and Tips on Retirement.

Good luck!