Roth Ira

The basics of a Roth IRA entail what exactly? Well, the first question is: what is a Roth IRA 401(k)? For that, let's turn the dial on "Mr. Peabody's Wayback Machine" to the year 1978. That was the year that the U.S. Congress was looking into ways to get people to save more money for retirement.

To many it was clear that way too many workers were looking to Social Security to sustain them, and this was not good. When that program was enacted, life expectancy was far lower than today. The simple fact of the matter is that it was never intended to support people; the payments were to augment people's income, not replace it. So, Congress realized that giving people a way to save, which would lower their federal and state taxes, was a good idea. This lead to the Tax Reform Act. Under Section 401, paragraph (k) tax-deferred savings accounts were created, the co-called Individual Retirement Accounts (the IRA). The plans became known as "401(k)'s", and it doesn't take a rocket scientist to figure out why.

The standard features of the account are as follows. First, the worker puts in a certain percent of their monthly gross salary, up to a maximum of fifteen percent, and a maximum of $15,000 each year. Second, the contribution is taken out of their paycheck before taxes are even determined.

This also means the money is removed before the worker ever gets the check; ergo, before they can have a chance to spend it. This makes it is a rather painless way of saving money for retirement. Third, while not always the case, the worker's employer may elect to match a portion of the worker's contribution into the account. And finally, the money is given over to a third party who invests the funds in stocks, bonds etc. Generally, the worker gets to decide which investments the money is put into, based on a list of available investment options.

And then, in 1997, the Roth IRA was created by the Taxpayer Relief Act. It got its name from Senate Finance Committee Chairman William V. Roth. He's been an advocate of retirement savings accounts like IRA's for a very long time. With this type of account, taxes are paid on the contributions the worker makes, but the savings grow tax-free, and then the withdrawals will not be taxed at all, provided certain rules are obeyed.

First, the recipient has to be older than age 59 years and six months. Second, the Roth IRA has to have been owned by the retiree for a minimum of least five years. Also, they allow people to continue to contribute to them, and do not require withdrawal of funds, even after age seventy. That's ideal for older Americans who want to insure that they have enough money to support themselves into their old age.