What Is a Roth IRA?

Many Americans worry about the future, and some people turn this worry into a productive decision to enroll in a retirement plan. A retirement plan ensures that an employee has something to live off one once they reach an age where they can no longer work. Although the goal of every retirement plan is to save money for the future, different plans try to accomplish this process in different ways. For this reason, it is important that one familiarize themselves with each plan in order to make the best retirement plan for their needs. One of these plans, which we will be looking at today, is a Roth IRA.

What Is a Roth IRA?

A Roth IRA is a retirement plan that taxes money differently than traditional IRA plans.

A Roth IRA is different from a traditional IRA in three main ways:

1.       A Roth IRA contribution is not tax deductible when filing taxes.

2.       A Roth IRA contribution is taxed before it is placed into savings.

3.       A Roth IRA’s income growth is not taxed.

Many people look at the first two differences and think that a Roth IRA is a poor choice, however, a Roth IRA has a huge benefit.

Roth IRA Earnings Are Never Taxed

Traditionally, earnings made on investments are taxed by the government, however, a Roth IRA’s earnings are not taxed by the government, which means all of the earnings go directly to the recipient. Let’s put it into perspective; say you want to put $100 dollars into a Roth IRA account. Supposing you make more than $38,700 but less than $82,500 a year, you are taxed 22% of your salary. Therefore, after you pay taxes, your $100 is turned into $78. However, let’s say you have 40 years of work until you retire, which means your $78 dollars has 40 years to grow. Supposing that the investment grows at a rate of 5% every 2 years, the final amount you would have in your Roth IRA would be $156 dollars.  This $156 dollars would be completely tax free, including the earnings! Therefore, your growth stays with you at the sacrifice of having less money to use at the beginning of your life. However, retirement is all about saving a stash of money for the end of your life, so having less money is no big deal!

If you are interested in obtaining a Roth IRA or other retirement fund, look no further than American Investment Planners. Our team can help you invest your money wisely and in through the methods that will be most helpful to you! Contact us now for a free quote.