Quite possibly the best thing to happen to retirement planning is the Roth IRA...and in case you haven't been reading GradMoney for very long, an IRA = Individual Retirement Account. Traditional IRAs are great, but the Roth offers some awesome tax benefits that other retirement accounts do not.
I opened a Roth IRA after receiving my first bonus in my first job out of college, and I've been contributing a little bit here and there ever since. However, there's no reason why you can't start sooner. If you believe that you'll be in a higher tax bracket by the time you retire, it makes plenty of sense to open one as soon as possible.
With some help from Investopedia, here is a fun introduction to the world of the Roth IRA in this edition of Macro Mondays - enjoy!
What is a 'Roth IRA'?
Named for Delaware Senator William Roth and established by the Taxpayer Relief Act of 1997, a Roth IRA is an individual retirement plan (a type of qualified retirement plan) that bears many similarities to the traditional IRA. The biggest distinction between the two is how they’re taxed. Since traditional IRAs contributions are made with pretax dollars, you pay income tax when you withdraw the money from the account during retirement. Conversely, Roth IRAs are funded with after-tax dollars; the contributions are not tax deductible (although you may be able to take a tax credit of 10 to 50% of the contribution), depending on your income and life situation). But when you start withdrawing funds, these qualified distributions are tax free.
What makes the Roth IRA different?
Similar to other individual retirement plan accounts, the money invested within the Roth IRA grows tax free. Other defining characteristics of a Roth:
Contributions can continue to be made once the taxpayer is past the age of 70½, as long as he or she has earned income.
The taxpayer can maintain the Roth IRA indefinitely; there is no required minimum distribution (RMD).
Eligibility for a Roth account depends on income.
What is the process of contributing to a Roth IRA?
In 2016, an individual may make an annual contribution of up to $5,500 to a Roth IRA.
Individuals who are age 50 and older by the end of the year for which the contribution applies can make additional catch-up contributions (up to $1,000 in 2016). For instance, an individual who is under age 50 may contribute up to $5,500 for tax year 2016, but an individual who reached age 50 by year-end 2016 may contribute up to $6,500.
All regular Roth IRA contributions must be made in cash (which includes checks); regular Roth IRA contributions cannot be made in the form of securities. However, a variety of investment options exist within a Roth IRA, once the funds are contributed, including mutual funds, stocks, bonds, ETFs, CDs and money market funds.
A Roth IRA can be funded from several sources:
Spousal IRA contributions
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