What is a Roth IRA and How Can it Reduce Your Taxes?

You’ve probably heard the term “Roth IRA” before, but that doesn’t necessarily mean you knew what it meant. Many people, even those who think they know and understand different IRAs or individual retirement arrangements, often hold misconceptions about what these plans actually are, their purpose, and what they can do for them in terms of reducing taxes. Roth IRAs are retirement plans that are generally exempt from taxation. Individuals receive the tax break when they take out money from the IRA while retired. Some Roth IRAs are made up of securities investments, while others are based on annuity contracts. Owners of Roth IRAs enjoy a fair amount of freedom and control over their plans. However, contributions cannot surpass the holder’s taxable compensation.

The best thing you can do, in terms of your taxes and in terms of your growing Roth IRA, is to leave the money or other assets you have untouched. When your assets stay in place, they gain interest, which makes you money. It gets even better though, because you are not responsible for paying taxes on the accumulated interest. It’s almost like getting money for free!

If you’ve had your Roth IRA open and in good standing for the past five years, then you’re in for a real, tax-saving treat. Accounts that are at least five years old are essentially fair game for you. You can, for example, take out all of the contributions you have made and not be assessed a penalty or expected to pay taxes on that money. Furthermore, you can withdraw as much as $10,000 of the money you earn with no questions asked and no taxes to pay. You won’t find that kind of an option anywhere else. Even if your account isn’t old enough for you to have this benefit, that should be some pretty powerful incentive to keep it open and in good shape!

It might seem a little bleak to mention death, but as the old saying goes, both death and taxes are unavoidable. The reason death is being brought up is because, in the event that something happens to you, you can feel good knowing that the assets within your Roth IRA can be handed down to your loved ones. Not only can you control how they receive their funds—either all at once or in yearly payments—but you’ll also be glad to know that they won’t have to pay taxes on the money they received.

Obviously, there are many benefits to opening up a Roth IRA and, if you don’t yet have one, now is as good a time as any to get one started! Don’t listen to the old myth that only the elderly or soon-to-be-retired open up these accounts either. Absolutely anyone who is earning an income can have a Roth IRA in most cases. To learn more about your options and to see how you can put a Roth IRA to work for you, contact your financial advisor today.

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