The ROTH IRA is one of the simplest and most cost effective ways to save for retirement, especially for those who are self-employed and do not have the advantage of a company pension or employer-managed retirement savings plan. The ROTH represents one of the best deals ever offered by the Internal Revenue Service in terms of an easy way to save money for retirement, and if you do not yet have a ROTH account you may want to open one as soon as possible.
The limits on how much you can contribute each year to this kind of retirement savings account were raised back in 2007 from $4,000 to $5,000, and a ROTH can even be started by a teenager. Or if you are already in your 50s and are worried about how to save for retirement, you can open one and the IRS will let you contribute up to $6,000 a year, which is $1,000 more than younger people are allowed.
Plus if you need to use the money you have already put into your ROTH account, the IRS allows you to take it out for a number of eligible reasons without having to pay any extra penalties. That’s not the case with most retirement accounts, where you will get hit with a huge tax if you suddenly decide you need to get the money and spend it on something urgent. Direct contributions to your ROTH (those that did not come, for example, from another type of retirement account) can be taken out with no penalties, because you already paid your normal income tax on those dollars.
Your contributions – while not deductible – grow tax-free. That means that you have to pay income tax on the money you make in the year that you earn it and contribute it to your ROTH – just as you have to do anyway with ordinary income. But once you reach retirement age and you take the money back out of the ROTH, you can do so without having to pay any taxes on your withdrawals – and that includes any interest you earned or other growth you made through such things as the price appreciation of your stocks. That’s a pretty sweet deal and is very easy to manage, making it probably the best retirement savings plan in the world – especially for those who are young and still have time on their side.