Have you ever wondered what makes a Roth IRA different from a regular Individual Retirement Agreement or a 401k? If you have, you are in luck. Today we are going to dive into the Roth IRA and highlight some of main differences and advantages.

Main Differences

A traditional 401(k) is a retirement plan based on pretax contributions from your paycheck. A Roth IRA is a retirement plan based on taxed contributions from your bank account. Since the tax is already taken out before you make any contributions, you will not be taxed when it comes time to make withdrawals.

This money grows tax free! You have payed the government already and can gain interest and see a return on investments without paying taxes on it again.

How it Works

There are some stipulations attached to a Roth IRA. You can only contribute $5,500 per year to a Roth IRA.

If you’re single, you must make less than $114,000 annually to contribute the full amount. You also must make less than $129,000 annually to contribute at all.

If you’re married, you must make less than $181,000 annually to contribute the whole amount. You also must make less than $191,000 annually to contribute at all.

Another cool feature if this account is that after 50 you can contribute up to $6,500 annually as long as you fall within the guidelines above.

Bonus!

Although Roth IRA’s are typically a retirement fund, they can be used on occasion for emergencies. Here’s how it works:

Contributions can be withdrawn at any time without penalty, but you must have held the account for five years.

Earnings, on the other hand, cannot be withdrawn before age 59 and a half without a 10% tax penalty. They are also subject to state and federal taxes as well. There are some exceptions here as well:

You can use funds early, including earnings, if you are buying your first home. There is a $10,000 lifetime limit on this type of withdrawal.

It can be used for certain higher education expenses, in certain cases for medical or health insurance expenses, and can be withdrawn by a beneficiary after you pass away.

Roth IRA’s are a smart investment in your future and provide great flexibility. This is especially important for young people who benefit from contributing to retirement earlier, but also may need the flexibility of accessing the money in emergencies. With this type of flexibility, it’s never too early to start saving for retirement!