One of the best investment accounts someone can open is a Roth IRA. Roth IRA is an individual retirement account where an individual can deposit up to $4,000 per year with their after taxed dollars. The money grows in the account tax deferred and tax free. Then you can use this account to invest in different types of investments depending on your risk tolerance and preference. So you can invest in Mutual Funds, Stocks, Bonds, ETFs, CD's.
The difference between a Roth IRA and an Traditional IRA is that the Traditional uses pretaxed money like a 401k plan(tax deductible if you qualify), while a Roth IRA uses after tax money. The money withdrawn when you retire is taxed at your tax bracket when you retire for the Traditional and tax free for the Roth. Traditional requires you to distribute money at 70 1/2 years old while the Roth has no distribution requirements. You can only invest up to $4,000 total in Traditional and Roth. You can invest in one or both and open as many accounts as you want, but it is easier to keep track of 1 or 2 accounts.
To qualify for the Roth, you have to make less than 95k per year to be able to put in the full amount, if you make between 95-110k, the amount will be less and you do not qualify if you make more than that. So it is a good idea to invest when you make while you still qualify.
You can open your Roth with a broker such as Scottrade, or with mutual fund companies such as Vanguard or Fidelity. Opening your accounts with a broker gives you more options to invest in different types of securities, but you are usually charged a commission. If you open an account with a mutual fund company, you are usually limited to their mutual funds or mutual funds within a mutual fund supermarket where you can invest in a network of mutual funds. Remember to only buy no-load mutual funds with low expense ratio(less than 1.5% per year). Make sure the brokerage does not have an fees for opening or maintaining an IRA account.
If you are young, it's usually a better idea to put your money in the Roth because you have a longer time frame to compound your money. You can withdraw from your contributions from a Roth without any penalties because you already paid tax on your contribution. The contributions are always taken out before the earnings, so it is more liquid than your Traditional. You should take money out of your Roth only in case of an extreme emergency(Not for buying a car or house since you cannot put the money you withdraw back in the account). Your earnings will be penalized unless you are 59 1/2 years old and have had your money in the Roth for at least 5 years.
About the Author: Loi Tran http://www.investingguide.blogspot.com
Source: www.isnare.com
