Explain Roth IRAs

To explain Roth IRAs and how Roth IRAs work, let's start with explaining where the concept of Roth IRAs come from. Roth IRAs are named after the US Senator William Roth. U.S. Senator William Roth sponsored the Roth IRA law. Roth IRA is an alternative way to save for retirement on a personal level. Roth IRA laws were enacted in 1998.

Explain Roth IRAs' tax breaks

In comparison to Traditional IRA, Roth IRAs do not offer immediate tax breaks. Under the Roth IRA tax laws, contributions to Roth IRAs are not tax deductible. However, Roth IRAs offer long term tax savings. The benefits of having Roth IRAs may actually exceed the benefits offered by Traditional IRAs and other types of IRAs.

Explain Roth IRAs' contribution limits

Contribution limits on Roth IRAs are the same as those for Traditional IRAs. Contributions to Roth IRAs accumulate tax free. If you have both Roth IRAs and Traditional IRAs (multiple IRAs) then your total contribution to all your IRAs (Roth IRAs and Traditional IRAs) must not exceed the IRA contribution limit set by the IRS. The IRA contribution limit is for all your IRA accounts, not per each IRA account.

Explain Roth IRAs' benefits vs Traditional IRAs

Roth IRAs have many benefits even when compared to Traditional IRAs or SEP IRAs. Although under the current Roth IRA laws, contributions to the Roth IRAs are not tax deductible, you have access to your Roth IRA contributions and can withdraw your Roth IRA money at any time tax free since you made the Roth IRA contributions with after tax dollars. The best thing about Roth IRAs is that, in addition to being able to withdraw the Roth IRA contributions, you can also withdraw earnings on these Roth IRA contributions tax free after five years and under specific circumstances. This explains why Roth IRAs are more popular when compared to Traditional IRAs for some investors.