Today, less than twenty percent of American employers offer their employees a traditional pension plan. In addition, more than one-tenth of employers do not offer their employees any type of sponsored retirement plan. This means that many employees, business owners, and self-employed people must plan and save on their own for their retirement.
A good option for many people is saving in a Roth IRA. These accounts were established by Congress to help the middle class to save for their retirement. In addition to retirement, funds from these accounts can also be used to pay for higher education expenses and the purchase of a primary residence.
In order to use a Roth IRA, however, it is necessary to understand how they work. An individual can deposit up to $5000 a year into one of these accounts. All of these contributions are taxable at a person’s normal federal income rate.
However, any money that has been deposited into one of these accounts can grow tax-free. In addition, the investor is allowed to withdraw these original contributions whenever he or she wants to for any reason. Withdrawals of the original deposits can be made without paying a tax penalty.
All of the money in the account can be withdrawn without any tax penalties as soon as the investor turns 59 ½. Unlike a traditional IRA, there are no rules or restrictions on how much an investor can take out of his or her account. This means that an investor can use the money to make a single major purchase, such as a retirement home or annuity, or take the money out slowly to pay for living expenses.
Money in a Roth IRA can be invested in a variety of options. Stocks, mutual funds, bonds, commodities, cash, and even real estate can all be part of a Roth IRA account. Of course, determining the exact allocation of the money in the account is up to the individual investor.
Finally, it is important to note that the money that is invested in a Roth IRA does not have to be used for retirement. Under the current rules, the money can be withdrawn once during an investor’s lifetime to make a down payment on a primary residence. Furthermore, the fact that contributions can be withdrawn at any time can make this a good way to save an emergency fund.