The Roth IRA was enacted in 1998 and ten years later, people are still asking “just what is a Roth IRA?” If you don’t know or want to learn more about the Roth IRA, keep reading to find out how it works, why it can be beneficial and whether it’s the right choice for you.

What is a Roth IRA?

To explain a Roth IRA, you first have to understand a traditional IRA. A traditional IRA is a retirement savings plan that lets employees have income tax deductions for their retirement investments and savings. Once you retire and withdraw that money, it is then taxed. You’re deferring your taxes.

Essentially, a Roth IRA, a new type of retirement account, offers employees the ability to withdraw their proceeds tax-free once they hit retirement. But, they get no tax breaks or deductions for contributing the money in the first place.

Is a Roth IRA right for you?

For some people, the Roth IRA is the perfect choice and allows them to achieve incredible tax savings. For others, it makes little or no difference, and they’d be much better off opting for a traditional IRA.

So, before you choose a Roth IRA, first check whether you’re better off with your 401(k). For example, if you have a 401(k) plan, your employer will match your contributions up to a certain level. That’s free money which is not taxed and it’s hard to pass up. Because of this, many people opt to contribute up to their employee matching maximum and then combine that with a Roth IRA.

However, if you suspect that your tax rate will be higher when you retire, then the Roth IRA is likely right for you. For example, if your tax rate currently hovers at 25%, but you suspect it could be as high as 40% by the time you retire, then it’s smarter to opt for the tax-free income later rather than sooner.

To estimate your future tax rate, look at your current position – are you at your peak earning potential, or rather are you just starting out in your career and expecting to earn more in the future? If you project that you fall into the latter, then a Roth IRA is for you. However, if you’re currently earning at your maximum and expect your tax rate to fall at retirement, then you’re better off sticking with a traditional 401(k) plan.

Who is eligible?

The income limitations on Roth IRAs are significantly higher than those for a traditional IRA. With a basic IRA, your income must be $60,000 or lower. With a Roth IRA, a married couple can make up to $160,000.

In the hopes of helping you understand what is a Roth IRA, you should now have a clear grasp of the benefits and drawbacks of this retirement savings plan and whether it’s a good choice for you.

About the Author:

For great information on senior retirement preparation – please visit seniorretiretips.com – a popular site providing insightful recommendations to help you get ready for the next steps in your life journey – including estate planning and trusts – http://www.seniorretiretips.com/estate-planning-and-trusts.shtml – 401K calculators – http://www.seniorretiretips.com/401k-calculator.shtml – and many more!

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