Simple Explanation of Roth IRA

by Diane Kuriluk ; Updated July 27, 2017

Roth Individual Retirement Accounts (IRAs) are meant to encourage working Americans to put aside money for retirement. Once you turn 59.5 years old, you can take tax-free withdrawals from a Roth IRA.

Function

You can use contributions you make to a Roth IRA to purchase assets -- usually securities, like mutual funds, stocks and bonds. You don't pay taxes on any earnings your assets make while they are in the account. And, beginning the year you turn 59.5, you can take tax-free withdrawals from your Roth IRA.

Considerations

The IRS requires you to open a Roth IRA with a certified trustee. Different trustees offer different types of investment opportunities. For instance, a bank may only offer bonds and CDs, while a brokerage firm might have many different stocks and mutual funds to choose from. You can switch trustees at any time by making an IRA transfer.

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Warning

You can withdraw your Roth IRA contributions anytime without tax or penalty. However, you may owe a 10 percent penalty if you dip into your account earnings. In some cases, the IRS may waive the penalty if you qualify for certain hardship exceptions, or if you use the withdrawal to pay for your first home.

About the Author

Diane Kuriluk has been writing about small business solutions, economics and personal finance since 2007 for sites that include Work.com. She is also a professional grant writer for nonprofit organizations. She attended the University of Michigan.

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