A ROTH IRA is a type of retirement account that can be set up which provides you with the advantage of being able to pay the taxes on what you invest now, rather than later. Just like other types of IRAs you simply use the funds to invest in financial products with the goal of seeing it grow for retirement.
Since you pay for the taxes upfront you won’t have to worry about paying them during retirement, which ensures that you’ll know how much you will be able to receive each month (or whatever payout term that you decide on).
The Basics of How a ROTH IRA Works
While your money will grow tax-free, there is one requirement that you need to be aware of to prevent paying taxes on your distributions. You must hold the account for a minimum of 5 years. As far as how much you can contribute, this relies on the guidelines set forth by the government (in 2020 this is $6,00 per annum).
The funds that you have in your ROTH IRA can be used to buy bonds, stocks, ETFs, mutual funds, or savings accounts. For the highest return possible you would probably want to consider something like stocks and bonds since other financial products don’t usually provide as much of a return on investment.
The Advantages of Having a ROTH IRA
As one of the most popular IRAs today, the ROTH approach comes with some rather strong benefits which you can see below.
· Embrace the opportunity to pass on your ROTH IRA to those you leave behind.
Unlike other forms of IRAs, you can leave your money in your ROTH IRA for as long as you live plus you can allow your heirs to inherit it. This makes it ideal for those who want to ensure that they’re able to take care of their family when they pass away.
· No hefty penalties and the ability to leave your money in your IRA.
Other forms of individual retirement accounts could come with a tax penalty of up to half of the distribution. However, you aren’t forced to take the distributions which means that you can leave the money in your IRA account for your entire lifetime.
· When you retire, you won’t have to worry about paying taxes.
Since you paid the tax bill when you made your contributions, there is no further need to pay taxes. Keep in mind that during certain situations you may have to pay additional taxes if you choose to make an early withdrawal.
For those who want the IRA with one of the biggest tax benefits, a ROTH IRA seems to be the most solid option in that sense. Its flexibility to allow your money to sit in the account and pass it along if something happens to you has made it ideal for families as well.