The Roth IRA is another form of a individual retirement account and is generally available to anyone who is saving up for their retirement. There are some differences between a Roth IRA and the other forms of retirement funds available to the marketplace. The advantage of a Roth IRA is that you are not taxed on your income after you retire.
However, when saving up for your retirement it may be better for you to start up a traditional IRA fund as opposed to a Roth IRA fund. The advantages you experience with a traditional IRA is that your relative tax bracket is lowered, thereby lowering your tax burden each year. With a Roth IRA fund your taxes remain the same, so the tax burden is still the same.
If your income level is relatively low than it may be better for you to use a Roth IRA as opposed to a traditional IRA fund. With a Roth IRA fund you don’t have to worry about the increase in the taxes that may occur over time. You see, it is pretty obvious that in order for America to actually pay for its increased debt it will have to eventually increase taxes on its citizens. With a Roth IRA you are shielded from that possibility.
There is no law stating you cannot have both a traditional IRA fund and a Roth IRA fund simultaneously. The only restriction would be how much you can invest in each fund with each year. You are only allowed to save up 5,500 dollars per year into any government allowed tax deferred fund such as a Roth IRA, Traditional IRA, or other form of account.
Of course, over time you may see your income rise to a level where a traditional IRA makes more sense. If that is the case than it would make sense to start one of those funds up to lower your tax burden each year. Every fund you have would dampen your ability to use compounding interest for your saving for retirement.
Compounding interest and the compounding effect is one of the most compelling reasons to start saving for retirement while you are just beginning your work life. For instance, someone who opened up a retirement fund at the age of 18 would have to save less per year over time. With compounding interest and the accumulation of stocks using dollar cost averaging a teenager could theoretically retire when they reached the age of 62 with little to no worry about outliving their retirement funds.
The same rules that apply to a traditional IRA apply also to a Roth IRA. Actually, the same rules pretty much applies to all of these retirement accounts. Always be sure to consult a tax attorney or tax accountant to make sure you are doing everything above board with the IRS and that you are compliant with all tax laws. The last thing you want is the IRS to come after you for some small mistake you made a couple years in the past.
One thing that many don’t realize is that they are not dependent upon their employer to offer these types of retirement funds to actually use them. For instance, you can start up a retirement fund at any time regardless if your employer sponsors one or not. It would be advantageous to you to use your employer sponsored fund because of the potential of your employer matching funds during the year, however, but it isn’t necessary.