Roth IRAs, IRAs?

Question

I have been hearing a lot about Roths and IRAs lately, and I would like to know exactly what they are, how they work, and if it would be a good idea to look into getting one. I am young, I haven't had to fill out tax returns or anything yet, but I will be in a year or so. I want to know the best way to invest my money and where to pt it so that it will grow.

Answer 1

Most financial advisors agree that you should put your money into a Roth IRA or IRA, as much as you can afford to, if you don't think you'll need the money soon. The beauty is that the tax treatment of money in a Roth and traditional IRA is much different from regular money.

Traditional IRAs are funded with pre-tax dollars, meaning you put the money in before paying taxes on it. For example, if you make $1000 every pay period but 25% of that gets taxed you only take home $750.

If you invest $100 of that normally, you're left with $650, but if you invest $100 pre-tax, then you only get taxed on $900 (instead of $1000) so your take home is $675, a difference of $25 every pay period.

When you take the money out after you're 59 1/2, you pay taxes on the money you put in and the gains.

Roth IRAs are funded with after-tax dollars, meaning that you pay taxes on the money and then put it into the Roth IRA. The beauty is that when you take the money out, you don't pay any taxes on what you invested or the money you made with those investments.

Going back to our previous example, you would have $650 take home if you invested $100 in your Roth IRA, but that money grows without taxes until you take it out (if you invest normally, there's a 15% capital gains tax).

Either talk with a financial advisor, or go to a site like Scottrade, or directly to an investment company to set one up. I recommend talking to an advisor to make sure it makes sense for you.

Answer 2

What do you imply through "minor?" Never heard of a "minor" IRA -- Roth or Traditional... The highest annual contribution to all IRAs mixed is the shrink of your earned earnings for the yr or $five,000. If you're age fifty five or older you'll kick in yet another $500 according to yr. If you kick $five,000 into the Roth IRA you then are not able to placed something within the Traditional IRA and vice versa. Or you'll break up contributions among the 2 any manner that you simply prefer, as much as the above limits. Any extra contributions draw in a 6% excise tax for each yr that they're left on deposit within the IRA. That's ample to wipe out any earnings in a long time so that you wish to hinder that.

Answer 3

Both are retirement accounts. You put money in the account and, when you take it out after age 59 1/2, it should have grown in to a rather large amount.

Traditional IRAs offer a tax break when you but money in. The downside is that the money is taxed when you take it out.

A Roth IRA is not deductible when you put it in but, as of now, the money isn't taxed when you take it out when you retire.

If you are young, I would look at a Roth IRA (I have two myself). The tax benefit on the back end will greatly exceed the tax deduction on the front end for a traditional.

One caveat: You must have "earned income" in order to contribute to either one. Earned income is a job or self-employment. If you are not working, you can not contribute yet.

Answer 4

Go to www.ira.com, www.investopedia.com, money.aol.com, among other sites. They have info on IRAs. Also recommend the book "Investing For Dummies" as a great introduction to investing.

Answer 5

Roth grows tax free. Talk to a tax professional when you open your account, but it's probably the best for you...

Answer 6

Wayne Z has done an excellent job explaining these for you.

I would just like to add that if you'd like to read more, here's a link with more information.

http://www.fool.com/ira/ira01.htm?ref=mp