What is a Roth IRA?

A Roth IRA is one of the newest ways to invest your money, but what is a Roth IRA and why should you have one?

According to Wikipedia a Roth IRA is an individual retirement account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, U.S. Senator William V. Roth Jr. of Delaware, a Roth IRA differs in several significant ways from other IRAs.

Established in 1998 (Public Law 105-34), a Roth IRA can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA’s main advantage is its tax structure. Contributions are made only from earned income that has already been taxed (and is not tax deductible), but withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (Self-Directed IRA).

One of the unique features of a Roth IRA is it can be used for certain qualified events without being penalized, such as; the first time purchase of a home or upon becoming disabled. The amount allowed for home buying expenses is $10,000 and your account must be open for five years to qualify. This is a basic overview to the question, “what is a Roth IRA?” A Roth IRA is something that should be part of every financial portfolio.