What's a Roth IRA?
Have you heard of a Roth IRA? Let’s explain what it is and why you should open one today.
“IRA” stands for “Individual Retirement Account.” These are retirement accounts that you open up on your own as opposed to through your employer.
There are generally two types of IRAs: Traditional and Roth. The Traditional IRA works just like a regular retirement account. You’re able to put in money before taxes and you'll pay taxes when you take the money out in retirement.
If you already have a retirement account from your job then you don't need one of these (you will get the same benefits with higher contributions at work).
What you do need is a Roth IRA. A Roth IRA has some unique features: First, you put in money after tax. What does that mean? When you get paid from your job, taxes are taken out of your paycheck, right? So you've already paid taxes on that money when it arrives in your bank account. To invest in a Roth, you take that money from your bank account and you use it to invest.
Why would you want to invest after-tax money? The cool thing about the Roth is that because you've already paid taxes on the money that you put in, you don't pay any taxes on the earnings that you make in the account. That means 30 years from now when you retire and you've amassed millions of dollars in interest and dividends, you have all of that money tax free!
That's a HUGE benefit. This is why everyone who qualifies for a Roth IRA should open one today.
How do you know if you qualify? There are Income limits. If you make less than $140,000 as an individual or less than $208,000 as a married couple (in 2021), then you qualify to invest in a Roth IRA. Generally, depending on your income, you can invest up to $6,000 a year.
Here's the quick summary. A Roth IRA is a retirement account. You put in money after tax and you don't pay any taxes when you take the money out after you retire.
So what do you think? Are you going to open one of these accounts today?