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An individual retirement account, or IRA, is a retirement-focused saving account used to hold investments in a tax-efficient way. While there are many ways in which an IRA can be presented to you, many providers usually focus on one of two major types, if not both.
A Roth IRA is one of those types. But what makes it stand out?
As it is with any regular brokerage account, you can invest the money you chose to contribute to a Roth IRA in any stocks. However, by going with a Roth IRA, you won’t have to pay any taxes that would typically apply to your stocks’ selling (do keep in mind that you would still have to pay taxes for your contributions, though).
And yet, the only significant restriction that would come into play is the fact that you would have to keep your investment profits in your account until you retire. Nevertheless, if you are already considering saving up for that specific reason, then the tax benefits alone make it a preferable choice.
Roth IRA vs. traditional IRA
When comparing it to its major counterpart, a traditional IRA, the most significant difference comes when you receive your tax benefits.
Contrary to Roth IRAs, the contributions to Traditional IRAs can apply for a tax deduction in exchange for not having to pay taxes when withdrawing your investment profits.
Due to this, Roth IRAs work best for individuals who expect their tax rate to be higher in their retirement than it currently is. And Traditional IRAs work better for those who expect a lower one.
Contributing to a Roth IRA
Contributing to a Roth IRA is an easy process. But, as it is with many other tasks, the first step to take is relatively the hardest out of them all. This is because there are many critical points regarding any future contributions.
Here are the most crucial ones:
- There is no required minimum contribution nor distribution.
- However, depending on your age, there is a maximum of between $6,000 – $7,000 applying per person, not per account.
- Your eligibility depends on how much money you make every year, considering your current financial status. For example, were to gain less than $125,000 per year as a head of household, then you are permitted to give a full contribution. If, instead, you had an income of $140,000 or more within the same status, then you wouldn’t even be allowed to contribute at all. This is a safeguard to ensure the Roth IRA focuses on helping the everyday American save up for retirement instead of just the wealthy.
Once you have taken all of this into consideration, you can make your contribution at any time, as long as it is in between the first day of the calendar year and the ending of Tax Day.
Evaluating Roth IRA accounts
Now there’s the matter of choosing the proper Roth IRA account for you.
Most brokerage firms offer a great variety, but the best option will always be that one that fits your investing style and goals. Here are some criteria you should consider when looking for options:
- Commissions: Some brokers tend to charge varying fees for specific actions you might need, such as account transfers. Try and look for all the hidden costs you could eventually face.
- Mutual Funds: If you are looking to invest in Mutual Funds, make sure your provider offers that option.
- Platform: Whether you want a user-friendly interface, or a full-featured complex one, do make sure your provider’s platform fits that need
- Resources: Some providers can offer access to educational resources that might help when researching any potential investing opportunity. If you feel you could make good use of it, try and look for options that do.
Should I go for a Roth IRA?
Are you still having doubts about whether you should register for a Roth IRA? Not sure if you genuinely need it?
No problem, then. Here are some situational statements that are common among people who could benefit from a Roth IRA.
Ask yourself, does this reflect my situation?
- I am not worried about saving money on my taxes right now.
- When retired, I would like to keep my taxable income as low as possible.
- I want to register for a traditional IRA, but I don’t qualify.
- I don’t want to be forced to withdraw any money from my savings account when I retire.
Roth IRA recommendations
If you would like to hear some recommendations for excellent Roth IRAs, here we have compiled some for you to give them a look. Maybe the right Roth IRA for you is among these options:
- Merrill Edge Self-Directed