What is a Roth IRA?

We're hearing a lot about IRAs lately, what with pension plans sucked bone-dry by the stock market and bank-failure debacle. So we thought it would be helpful to understand what IRAs really are and how many different kinds are out there.

An individual retirement account, or IRA (not to be confused with your bubbie's other grandson), is essentially a retirement plan that allows you, the taxpayer, to set aside funds, usually tax-deductible, for your golden years. And you can generally invest those funds in whatever you like: stocks, bonds, real estate, mutual funds, etc.  There are seven different kinds of IRAs, although two of them - the Rollover IRA and the Conduit IRA - are now considered obsolete. Here's a brief rundown on one in particular: the Roth IRA.

The Roth IRA (named for the late Delaware senator who sponsored the legislation) is different from a garden-variety IRA in several ways, namely that there are fewer restrictions on when and how much you can withdraw. Unlike a traditional IRA, contributions to a Roth IRA are NOT tax-deductible. On the other hand, most withdrawals are tax-free, with a few, simple stipulations. Happily, the Roth IRA doesn't discriminate based on age - if you don't need, don't want or don't care about the money in your account, or if you want to leave it to your great-niece in Toledo, you can let your it sit there and amass tax-free income. You don't have to start withdrawing by the age of 70 ½, and you can go on making contributions until you croak. And the distribution rules aren't going to send your beneficiaries to the poorhouse.

If you're betting on the tax rates being higher by the time you retire (and since we have to pay for wars, bailouts, and now Medicare and Social Security, they almost sure will be), you may want to consider a Roth IRA. Do the math. Use the current tax rate for the income you expect to have when you retire, and assume that the tax rate will be around 8%-10% higher (or even worse) when you retire.

Grow your knowledge about Roth IRAs with this smart, straightforward article at Kiplingers.com: http://www.kiplinger.com/columns/starting/archive/2006/st0309.htm. Or go straight to the source: http://www.rothira.com/

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Still confused? Feel free to ask a question below and we'd be happy to answer it. Think we left something out? Please let our readers know.

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