What Is a Roth IRA?

Learn about Roth IRAs in this Howcast finance video with expert Gregory McGraime.

Transcript

IRA stands for individual retirement arrangements, and there are types of retirement accounts that you could use to save money for the future. Now, you may have heard of a traditional IRA, and with a traditional IRA you put money in today and you get a tax benefit for doing that, but then you take money out in retirement and that's when you pay the taxes. A Roth IRA is different. With a Roth IRA, when you put money in there today, you get no tax benefit at all. The real benefit of a Roth IRA is in the future, because I put my money in, that money grows, and as long as I meet certain conditions, I take all that money out, and the growth in retirement, completely tax free. No taxes at all. And so that's great, that's one of the few places the average person can invest and never have to pay tax on that money. Now again, it's not without its drawbacks. There are certain limitations or criteria that you have to meet in order to get that tax free treatment. But a lot of people are worried about tax rates going up in the future. And so by having some money in a retirement account that can come out tax free that can really provide you a lot of flexibility in retirement. And even if you're not sure what your tax rate is going to be in the future, a Roth IRA provides something called tax diversification, in that it gives me that added flexibility that I may need to avoid taxes in the future if I'm potentially at a higher tax bracket, or if tax rates just happen to go up in general. So I would strongly urge you to consider funding a Roth IRA if you're eligible to help supplement your future retirement.

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