Saturday, February 15, 2014

What is a Roth IRA and how to calculate it

What is a Roth IRA? It is a type of Individual  Retirement Account established by the Tax Payer Relief Act in 1997. It was principally designed to encourage people to plan for their retirement individually in order to reduce strain on the Social Security system and develop more financial independence in retired citizens.

How It Works

Deposits are non tax deductible in contrast to a traditional IRA. Because of this, withdraws on principle after 5 years are not taxable as they would have already been taxed before contribution. After age 59 1/2 withdrawals on growth are allowed with no penalty or tax.


All direct contributions to a Roth IRA may be withdrawn tax free at any time. This is because the funds have already been taxed.

Funds rolled over from another IRA or a 401K or similar retirement fund may be withdrawn penalty and tax free after remaining in the Roth IRA for 5 years.

After age 59 1/2 earnings from interest or investments may be withdrawn subject to no tax or penalties.

Up to $10,000 of the account’s earnings may be withdrawn to purchase a home with no taxes or penalties if the following apply:

  • The home must be purchased by either the owner of the Roth IRA, the spouse of the owner, or a direct descendant of the owner.
  • The home buyer must have not owned a home in the preceding 24 month period.

In the event of the death of the Roth IRA owner, their spouse (if they are the beneficiary) may merge the Roth IRA with their own Roth IRA to make a single account with no taxation or penalty.

Consider these benefits when planning your future and look for an institution that can help you set up your Roth IRA. It is vital that you find a good trustworthy institution to manage your retirement planning, so search for a company that you can rely on, and attain to financial independence. You can find the right one by using our online ROTH IRA calculator and comparing the results.

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