What is Roth IRA and How Does it Work

Financial insecurity is what takes away the peace of mind from an individual more than anything else. Since the past few years, the awareness towards senior citizens has increased, as a result many retirement and senior citizen benefits are being given. One amongst such schemes is the Roth IRA.

What is a Roth IRA?

Roth IRA refers to an Individual Retirement Account (IRA), which is allowed as per the tax law of the USA. It is named so after its chief legislative sponsor, late Senator William Roth of Delaware. This provision has been established by the Taxpayer Relief Act of 1997 (Public Law 105-34). The best part about it is that, contributions to it are not eligible for a tax deduction the year it is invested in. It grows tax free and distributions are not taxed after retirement. It is basically a retirement account.

How Does it Work?

Point 1

A Roth IRA is different from other retirement accounts in quite a few aspects. To begin with, in a Roth IRA, an investor first pays income tax on income earned from work or alimony. The tax payer then makes contributions to the account using post taxation money. This is what makes it different from a regular IRA.

Point 2

How much ever money you invest in Roth IRA, it will increase, and it will be free of tax. Besides, there is no federal taxation when the person who has the account withdraws the money.

Point 3

Another good thing about the working of Roth IRA is that when you withdraw the earnings, they are tax free, if you are above 59

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