Roth IRA’s – One Size Fits All

OK.  Maybe not all.  But most.  Whether you are just starting out or well into your career the Roth IRA will provide you with an exciting way to save on taxes and ultimately hold onto more of your money.  I recommend it as the vehicle to save for that all important emergency fund, first home, college fund, and, of course, retirement.  And, let’s face it, unless you plan on kicking the bucket in a few short weeks, who doesn’t need an emergency fund or retirement fund?
The Roth IRA has one awesome characteristic.  All monies contributed to your Roth IRA are after tax dollars.  That means you pay your tax before you invest it.  All earnings from your IRA remain untaxed in your IRA until you withdraw these funds.  This includes interest, dividends, capital gains etc.  When you withdraw money from your Roth IRA after your 59 1/2 birthday (and your IRA has been open at least 5 years), all these funds will come to you totally tax free.  If you withdraw money earlier, then  any increase in your Roth IRA is subject to taxes and penalties.
But what about your initial contributions? Because the tax has already been paid on the contribution to your IRA, that amount can be taken out without tax or penalty.  Stash your  funds in a ROTH IRA and that money will remain available to you whenever you may need it.  Any earnings should be left if for the long run, but the original contribution may be taken out in an emergency with no adverse effect (other than decreasing your retirement savings).  If you need to tap these funds, simply withdraw the original contributions and leave the earnings for your retirement.  You will not have any penalty or additional tax to pay.
At the end of the year, you will receive a 1099R stating the amount of money that you have withdrawn from your account.  This must be listed on your 1040 federal tax form.  But you also get to list the original amount of your contribution.  This is known as your basis in your IRA and is simply the total money that you had invested and left in your Roth IRA.  If necessary you can withdraw funds more than once from your IRA.  Simply reduce your basis by the amount you have withdrawn in the past.  As long as you have basis, a pre-retirement withdrawal will not be included in your taxable income.
IRAs and retirement funds are not to be tapped lightly.  They are meant to provide security in your twilight years. The discipline of putting money aside for fifty years is daunting…you may be hesitant to commit funds for such a long time.  The Roth IRA encourages this savings by leaving a back door open to tap these funds.  Through the Roth IRA you will have taken your first step towards financial independence.

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