A ROTH IRA is something that many people do not think of while they are young. Many people think that ROTHs are for only those who are thinking about retirement…or they have the wrong idea and think that a ROTH is bad.
In very simple terms a ROTH is a great place to put your money because you put money in after tax and can keep it as long as you need and then take it back out tax free. There are a few rules to note but they are very simple to follow:
You can contribute up to $5,500 (currently) into either your ROTH or Regular IRA, or a combination of those two. This money is in addition to money that you can save in your 401K so that is extra savings for you!!
Your money goes in after taxes (boo!!!) but you can withdraw it tax free (yaaay).
You can withdraw your money any time after you have had the account for five years and you won’t have to pay additional taxes on it. Now here is the catch…any money that you put in can be withdrawn at any time without a tax penalty. So if you put in $1,000 and withdraw part or all of that $1,000 before the five year period you don’t pay taxes.
However your investment will earn interest and if you withdraw any of the interest before the five year period then you will have to pay taxes on that (bummer).
There are a few other rules to note and those can be found on the IRS page but you can generally avoid paying the taxes by simply not taking out more than what you put in.
So why do I need a ROTH IRA?
So a ROTH IRA is excellent if you are already putting in the maximum amount into your 401K or 403B but you still want to save additional money.
If you have not put in the maximum amount a ROTH is still a great idea because unlike the regular IRA you are not forced to withdraw money from the account once you reach age 70.5. This is excellent if you think you may not need the money but still want to have access to it in case you do.