If the thought of sifting through all the different types of retirement accounts and terminology makes you cringe, don't worry. Roth IRAs are both simple to open and straightforward in their rules. Whether a Roth IRA is the right choice for you, however, depends both on your financial situation now and your future plans.
A Roth IRA is a retirement account that allows your money to grow tax-free for as long as you'd like. Because you put after-tax dollars into the account, you don't have to pay taxes on the money you withdraw from the account in retirement. There is a limit to how much you can put into a Roth IRA; as of 2011, you may invest up to $5,000 each year.
Who Is Eligible
To contribute to a Roth IRA, you must meet certain guidelines. First, you must earn income from a job. Secondly, as of 2011, your annual gross income must be under $105,000 if you are single or $166,000 if you are married filing jointly. You may open a Roth IRA at any age as long as you meet these guidelines.
Even if you foresee yourself earning above the income limit for an IRA in the future, opening an IRA may be a smart move while you are young. As long as your account is open, it will continue to accrue interest --- whether you're investing more each year or not. Additionally, if you take time off of work, your spouse can still contribute to your Roth IRA on your behalf. Finally, the fact that you can withdraw from your Roth tax-free is a major bonus to investors who anticipate being in a higher tax bracket in retirement.
Investing in a Roth IRA
If you opt for a Roth IRA, you have until the tax-filing deadline of any given year to open one or make a contribution to an existing account for the previous tax year. You may open a Roth IRA through nearly any bank, mutual-fund company or brokerage firm. Furthermore, if you have a Traditional IRA but the Roth is looking like a better choice, you may convert your traditional account into a Roth. However, you will have to pay taxes on the account switch.
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