Like the kitchen gadgets advertised on late-night TV that can slice, dice and turn radishes into roses, the Roth individual retirement account is an amazingly versatile product. Its primary purpose is to provide a tax-advantaged way to save for retirement. But unlike other retirement-savings accounts, Roths let you use the money for a variety of purposes without triggering crippling taxes or early-withdrawal penalties. Investing in a Roth won’t reduce next year’s tax bill. The payoff comes later. Once you’re 591/2 and have owned the Roth for at least five years, withdrawals are tax- and penalty-free.
That makes Roths particularly attractive for young workers. If you’re just starting out, you’re probably in a low tax bracket, which makes the upfront tax savings of a deductible IRA less valuable. A Roth, however, promises decades of tax-free earnings growth. And if you find yourself in a much higher income tax bracket when you retire, your tax-free withdrawals will be all the more valuable.
In 2013, you can contribute up to $5,500 to a Roth IRA (or $6,500 if you’re 50 or older). You may invest in both a Roth IRA and a 401(k) plan. And if you can afford to do both, you should.
Once you invest in a Roth, you should leave the money alone until you retire. But if you need money in a pinch, you may withdraw the amount of your contributions at any time, for any reason, without paying taxes or penalties.
If you withdraw earnings from your Roth before age 591/2, you’ll usually pay taxes on that money, along with a 10-percent penalty. But if you’ve owned the Roth for at least five years, you can withdraw up to $10,000 in earnings for the purchase of a home without paying taxes or penalties. Plus, your contributions come out tax- and penalty-free .Send questions and comments to email@example.com.