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Roth IRAs have become the most recent buzzword in the realm of saving up for retirement. They are a specific type of IRA, or Individual Retirement Account, that can surely help even the most reluctant investor get closer to their fantasy of days spent reading or hitting the golf course.

In an economy of constant spending and ominously rising debt, Roth IRAs were established to encourage people to save. As a result, setting one up is surprisingly straightforward.

Roth IRAs vs. other retirement accounts

You have several options of where to put the money you're saving for your retirement:
~ 401(k) accounts - Employers frequently offer these accounts where a portion of your salary is stowed away in investments to grow until your retirement. Some employers provide 401(k) contribution matching; if yours does, take advantage of it at least to the maximum that they will match.
~ Traditional IRAs - These accounts allow you to save money tax-free until you take it out when you retire. They reduce the amount of your income that is immediately taxable, giving you a short-term tax benefit.
~ Roth IRAs - These differ slightly from the traditional form in that you have to pay taxes on the money you put in as soon as you contribute it. But then you don't have to pay taxes on the earnings when you retire. This difference in tax timing becomes the main strong point of Roth IRAs because it translates into higher interest gains for you.

Why set up a Roth IRA?

The main benefit of a Roth IRA is that it helps maximize your interest earnings by shielding them from taxes. Think of Roth IRA as an investment that gives you a buffer so you can grow your savings and reap all the rewards directly. That is, by paying taxes on your investment upfront, you guarantee that any interest you earn will be tax-free and completely yours to keep.

If you were to put your money in a traditional IRA, on the other hand, you would end up paying taxes at the back end - taxes on both your initial investments AND any interest that those investments have gained.

Are there any risks?

A Roth IRA tends to be more valuable than a traditional IRA or a 401(k) account in the long run, as long as the taxes you pay upfront on your contributions will be lower than when you collect your retirement funds in the future. Of course no one can predict the future, so there is always the risk that your upfront taxes will end up being higher, offsetting the gains of your Roth IRA, and rendering it less valuable.

However, keep in mind

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