What if I told you there was an investment tool that allowed you to save money for retirement, allowed the money to grow tax-free, and that the income generated during retirement was also tax-free? You would probably think it was too good to be true or you might ask what the “catch” was. If you were like many of today’s smart investors you would want to take advantage of an investment tool that did all of these things. Well, there’s good news – a ROTH IRA offers all of these advantages.
What’s a ROTH IRA? Let’s start with the basics. An IRA or Individual Retirement Account is an investment that receives tax favored treatment for the purposes of income taxes. The government has decided that it is a good idea for us to be self sufficient and save for our own retirements. As an incentive they have created special rules for investment designed to be used during retirement. The most common examples are 401K, 403b, or a company pension plans. All of these fall under the special tax rules and work basically the same way. Money can be saved on a pre-tax basis and earn interest (grow) without any taxes being paid as well. Once the money is used during retirement, taxes (primarily income tax) are paid on the income as it is received.
Unlike the traditional tax-deferred investment accounts, a ROTH IRA is different. The money put into a ROTH account is taxed prior to being invested – and that makes all of the difference. Because the money has already been taxed, it is allowed to grow tax-free and the income generated during retirement is also tax-free. A good analogy of the two and a way to determine which is best would be to ask yourself “would you rather be taxed on the seed, or on the crop?” If your answer was on the “seed” then you understand the value of tax-free growth and tax-free income.
By the way, there is only one other type of investment that provides these same benefits without the restrictions of a ROTH – cash value life insurance. I would recommend that you talk to a reputable “Financial Professional” to see if either one of these options makes sense for you.