Someone help me define what a Roth IRA is??

[SubaruSTiMike]

Ok, I've been researching about Roth IRA and read a few threads. I've read on wikipedia and other forums on their definition because many people ask about it, but I still have some questions. It's suppose to be an Individual Retirement Account, so if I put money into a Roth IRA, does the money grow? What exactly am I investing in? I've read it's a mutual fund, and others say it's a combination of CD's, funds, stocks, etc...but what is it? Is it JUST an account where it's tax exempted that I myself have to allocate the funds to the investments I want to make? Or is it just like any other fund where I put money in, it gets invested in a variety of things, and I get the return? If so, then what is the investments is the Roth IRA putting my money in?? I'm very confused...

I ask this because I remember reading a thread about if I put in the maximum amount of money allowed for a few years I'd have a lot when I retire. If that's the case, then it means the the IRA gives you a return without you having to allocate money into other investments? But now I'm reading you have to put in the money and buy investments?

If the IRA is just a retirement account that holds your money that you invest, I can only see a few advantages like helping your self control of wanting to withdraw the money, and being tax exempted when you withdraw at the age minimum.

The disadvantages I see is if you are actively investing you can't take the gains from your investments and put it somewhere else?


Thanks.

[captZEEbo]

okay a roth ira is like a holding place for your investments. Within a roth ira you can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible)

You pay after tax dollars into your roth ira and then you don't have to pay federal taxes when you withdrawal at 59.5 (this allows the investments to grow tax free which is HUUUUGE and the only reason people use the iras at all).


[ QUOTE ]
The disadvantages I see is if you are actively investing you can't take the gains from your investments and put it somewhere else?

[/ QUOTE ]Within the ira you can buy and sell when you want, and then you won't have to pay short-term capital gains taxes either when you sell! An ira is the perfect place to keep money for a day trader that's using the money for retirement. Unless by "somewhere else" you mean to fund a plasma tv?

[jut111]

a roth ira is simply a type of retirment account. what it is invested in is completely up to you. the main difference between a traditional and a roth is when the money is taxed. in a traditional money you contribute is not taxed in that year. so if you make 40K and contribute 3k to an ira in 2007, you only pay income taxes on 37k for 2007. you pay taxes on the principal and earnings when you withdraw.

in a roth, you put money in post tax but when you withdraw, you do not pay taxes on the earnings you have made.

simple rule of thumb, if you feel that you are in a lower tax bracket now, then you will be when you withdraw go with a roth.