What is Roth IRA and General Roth IRA Rules
Created in 1997, the Roth IRA might not be the most talked about topic in most people’s daily life, but it is certainly one of the most important things you need to know in your financial life.
You are certainly on the right path because you are actively seeking out information related to your personal finance future. Roth IRA, when used properly and strategically, can be a great tool to build and perpetuate wealth.
Roth IRA vs Traditional IRA
In the traditional IRA (individual retirement account), you get a tax deduction, which means it lets you contribute pre-tax dollars into the retirement account. When you withdraw the money from the account, you pay income tax on the amount you withdraw.
Think of Roth IRA the opposite. The Roth IRA was designed to avoid the payment of taxes at the time of distribution (of course, provided you meet certain requirements). In other words, with traditional IRA, you do not pay taxes when contribute, but pay taxes on the amount withdrawn. With Roth IRA, you pay taxes when you contribute (and there is a Roth IRA contribution limits you need to abide), you do not pay taxes on Roth IRA distribution!
You probably already know the power of compound interest, and how it can do wonder during the accumulation years of an IRA account. But most people do not realize the effect of tax-deferred (traditional IRA) or tax-free (Roth IRA) compounding during the distribution of an IRA. The difference can be huge because with traditional IRA, you are paying taxes on a much larger amount (amount you accumulate and grow for 20 years), while with Roth IRA, you pay taxes on the contribution. Hopefully now you can see the difference between Roth vs traditional IRA.
Common Misunderstanding about Roth IRA
While it is true that there is an annual Roth IRA contribution limit you have to follow, there is no Roth IRA income limits. Please do not get confused with the two here. Contribution is the money you “deposit” into the account. Income is the money you earn using the money in the account. For example, say you are very lucky to invest the money in your Roth IRA in the next Google stock, the IRS cannot limit how much you make with your investment.
Many people don’t understand what is a Roth IRA and what are the Roth IRA rules. Even when they think they do, in many cases they actually don’t. The reason is, the country is full of the so-called “financial planner” who are not properly trained and often time misinformed. The sad thing is, people took their advice like a gospel.
The world is facing an unprecedented economic crisis, and many Americans’ life saving were shrunk into half! If there is any one time in your life you need to take control of your financial destiny, the time is now!
While this is not the best Roth IRA advice anyone can give you, I hope it does give you a head start and basic understanding on this wonderful government-created tax shelter program called the Roth IRA.
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