A Roth IRA is a retirement account that allows you to save money for your retirement, allows it to grow tax free and be taken out tax free. The critical difference between a regular IRA and a Roth IRA is the tax when the money is taken out. With a regular IRA the money that’s taken out is taxed. Taking money out of a Roth IRA, if you follow the rules, is not taxable.
Here is a good summary of the difference between a regular IRA and a Roth IRA
The biggest difference between the Traditional and Roth IRA is the way the U.S. Government treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.
On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.
To learn more about Roth IRAs, contact us.