by Peter K

Created on: January 22, 2007   Last Updated: March 17, 2007

A Roth IRA is a type of retirement investment account that is usually self-managed by the investor. Unlike an employer 401k, a Roth IRA account has access to all the stocks, bonds, and mutual funds that a typical investment accounts can trade, and sometimes even more.

Roth IRA are different than a traditional IRA primarily in the way they assess taxes. Contributions to a traditional IRA are tax-deductible the same year, but taxes must be paid at withdrawal when you retire. Contributions to a Roth IRA, on the other hand, are taxed as any other income when you contribute, but can be taken out tax-free at retirement.

As with all IRAs, there are contribution limits each year, but those limits do increase with inflation, and also allow for catch-up contributions if you are close to retirement. There are also provisions to take out money early penalty-free, if for example, you wish to use the money for a first-home down payment.

A Roth IRA is an ideal method to supplement or replace a 401k employer plan as a tax-free vehicle for retirement savings. It can also be used to consolidate old 401k plans into a single account for easier management and more investment options. Happy investing!

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