What is a Roth IRA? Whiteboard Wealth #11
It seems so simple to some people, but to others the concept of a Roth IRA is still foreign. I still get asked in meetings “What is a Roth IRA?” Granted, not too terribly often, but our clients are likely on the higher end of investment knowledge than the general population of investors.
So just “What is a Roth IRA?”
Roth IRA’s were created in 1997 as part of the Taxpayer Relief Act of 1997. They’re named after the sponsor of the legislation which created them – Senator William Roth from Delaware.
A Roth IRA is simply an account which shelters you from taxes. That’s the “tax deferral” part of what you may have heard about a Roth IRA. If used properly, a Roth IRA may be tax free forever (including to your ultimate beneficiaries when you die).
Check out this episode of Whiteboard Wealth #11 – What is a Roth IRA?
So “How does a Roth IRA work?”
It’s pretty simple. You make contributions with after-tax money to a Roth IRA. You can put up to $5,500 per year ($6,500 if you’re age 50 or older) into a Roth IRA (contribution limit) provided your Adjusted Gross Income is within the limits.
Once the money is in a Roth IRA you can invest it in anything the custodian will allow you to. This means stocks, bonds, cash, money markets, real estate investment trusts, etc. are all fair game for most Roth IRA custodians. This allows your investment to grow for retirement.
Once you reach age 59 and 1/2, the Roth IRA funds can be withdrawn completely tax free (provided the account has been open and funded for at least 5 years). You can even withdraw your principal at any time without penalty prior to age 59 and 1/2. This makes the Roth IRA a good deal for things like college expense savings or a home purchase. Although, ideally the Roth account would remain in tact throughout your life, only drawing on it in retirement when your income from other sources pushes you to the top of a certain tax bracket to keep your overall tax liabilities to a minimum.