Investors should also remember that they can contribute to an IRA until the following year's tax-filing deadline. In the case of a Roth IRA, you fund the account with after-tax money and you don't pay taxes when you retire on principal or interest, as long as you've held the account for at least five years. All deductible contributions and profits you withdraw or that are distributed from your traditional IRA are taxable. On the other hand, Roth IRAs allow people to pay taxes when they deposit money, ensuring that they won't have to pay taxes when they withdraw it, as long as they comply with the withdrawal rules.
Another thing that people should think about when they contribute to a Roth IRA are the other investment opportunities available to them. The owner of a traditional IRA doesn't immediately owe income taxes on the money deposited in the account. The following table shows how the tax advantages of an IRA can have a drastic impact on savings over several decades. However, to get the most out of a Roth IRA, you need to know how it works and what the maximum contribution limits are.
In addition to mutual funds and exchange-traded funds (ETFs), many IRAs allow you to choose stocks, bonds, and other individual investments. The fantastic thing about putting your retirement money into a Roth IRA (like you did) is that the money will grow tax-free and can usually be withdrawn tax-free six months after your 59th birthday. A Roth IRA is an individual retirement account that allows you to withdraw money tax-free when you retire. A Roth IRA is not deductible: you pay taxes in advance on your contributions and then make tax-exempt withdrawals when you retire, but eligibility is based on income limits.
In a traditional IRA, you deposit funds into the account with pre-tax money and pay income taxes when it's time to withdraw money. To get the most out of an IRA, whether it's the traditional or Roth variety, you'll need to understand how these accounts work in general and their annual contribution limits in particular. If you contribute only once a year to your Roth IRA, you may invest your money at a high or low point in the market, which could prevent you from earning the maximum amount over time. The government imposes restrictions on who can contribute to a Roth, basically limiting or eliminating its use by people with high incomes.