Explained: Roth IRA

What is it? A Roth IRA is a retirement investment that you can put money in post-tax and any interest you gain is tax-free upon withdrawal.

Benefits versus 401k or Standard IRA

Interest you earn on 401k’s and regular IRA’s are taxed, but the tax free benefit of Roth IRA’s is the biggest benefit to investing in them.

Another benefit of Roth IRA’s housed outside of your employer would be that they may have more options to invest in. I invest mine in a low fee, target retirement fund.

Which first? Roth or 401k?

Common thought is that you contribute first to your 401k (pre-tax) up to as much as your company matches you, then you max out your Roth IRA. After that you go back to contributing in your 401k. For example, if the company you work for matches your contributions to 4%, you should first contribute 4% to your 401k. And if you don't, you should. Its free money!  Next max your Roth IRA, then keep contributing 5%, 6%, etc.

What are the Contribution Limits?

For 2011, the maximum contribution is $5,000 a year. If you are above age 50 though, you can contribute up to $6,000.

What are the Rules?

You can only contribute as much money as you made in that calendar year. For example, if you only made $2,000 in the year you can only contribute $2,000. This would mainly relate to high school or college students.

You can contribute to your Roth IRA until April 15th of the next year.

You can withdraw your principle (contributions) at any time without penalty, but if you try to withdraw your earnings there will be a 10% penalty imposed.

You can withdraw up to $10,000 of your earnings without penalty for a first home purchase.

Where to Start a Roth IRA

I have my Roth IRA at Vanguard but they have higher minimums to start an account than some people may have. Other main Roth IRA specialists are T. Rowe Price and Fidelity.

Let me know if you have any questions. Roth IRA’s are a great vehicle to keep help you save for the future!