- The purpose of the Roth IRA is to help you save for retirement with a major tax advantage. With other types of retirement accounts, you do not pay taxes upfront, but when money is withdrawn during your retirement years, you have to pay taxes on it. With a Roth IRA, the money that you withdraw during your retirement years is fully yours to keep. Many people like the idea of not having to worry about taxes in the future and the Roth IRA makes it possible.
- Rolling over funds from another retirement account into your Roth IRA is an option that you could consider if you have an IRA or a 401k. If you roll funds from one of these accounts into a Roth IRA, you will have to deal with the taxation of the funds. The Internal Revenue Service requires you to count as income all of the money that you convert. This increases your annual income and could potentially put you in a higher tax bracket.
- When you make contributions to a Roth IRA, you can invest that money in different securities. You have many investment options such as stocks, bonds, mutual funds and real estate. When choosing the investments for your Roth IRA, you should look at the annual returns and the level of risk that is used to achieve those returns. Using risky investments for your Roth IRA may not be the best strategy, as you will be counting on this money when you retire.
- One of the popular features of the Roth IRA is that you can withdraw funds that you contribute at any time without paying a penalty. By comparison, with a traditional IRA, you would have to pay a 10 percent early distribution penalty on the money that you take out before the age of 59 1/2. While you can take money out of your Roth IRA in an emergency, you should stay away from this practice so that you can continue to grow your retirement funds.
- To make contributions to your Roth IRA, you need to follow the rules that are set forth by the Internal Revenue Service. One of the rules is that you cannot contribute more than you earn in a year. For example, if you get started young in life and you do not have a full-time job yet, you can only contribute what you earned, up to the annual contribution limit. As of 2010, this limit is $5,000 per year unless you are older than 50 and you can then contribute $6,000 per year. You also have to make less than the maximum income guidelines for the Roth IRA to make a full contribution. These guidelines change frequently to keep up with inflation.