A Roth IRA is a retirement savings account that is available in the United States, and therefore not applicable in the UK. It is named after its chief legislative sponsor, Senator William Roth, and was created in 1997 as part of the Taxpayer Relief Act.
A Roth IRA is similar to a traditional IRA in that it is designed to help individuals save for retirement. However, there are a few key differences between the two types of accounts.
One of the main differences between a Roth IRA and a traditional IRA is how they are taxed. With a traditional IRA, contributions are typically tax-deductible, meaning that you can reduce your taxable income for the year by the amount you contribute to the account. However, when you withdraw money from a traditional IRA in retirement, you will owe income tax on the distributions.
With a Roth IRA, contributions are made with after-tax dollars, which means that you don't get a tax deduction for contributing to the account. However, when you withdraw money from a Roth IRA in retirement, you won't owe any taxes on the distributions, provided that you meet certain criteria.
Another difference between the two types of accounts is that with a traditional IRA, you are required to start taking distributions once you reach the age of 72. This is known as a Required Minimum Distribution (RMD). However, with a Roth IRA, there are no RMDs, which means that you can keep your money in the account for as long as you want.
There are also income limits associated with Roth IRAs. In 2021, if you are single and your modified adjusted gross income (MAGI) is more than $140,000, you are not eligible to contribute to a Roth IRA. If you are married filing jointly, and your MAGI is more than $208,000, you are not eligible to contribute to a Roth IRA.
If you are eligible to contribute to a Roth IRA, you can contribute up to $6,000 per year in 2021, or $7,000 if you are over the age of 50. You can contribute to a Roth IRA up until the tax filing deadline for the year, which is typically April 15th of the following year.
There are a number of advantages to using a Roth IRA as a retirement savings vehicle. One of the main advantages is that your money grows tax-free in the account. This means that you don't have to worry about paying taxes on any capital gains, dividends, or interest earned in the account.
Another advantage is that you can withdraw your contributions at any time, tax-free and penalty-free. This can be useful if you need to access your savings for an emergency or unexpected expense.
Additionally, because you are contributing after-tax dollars to the account, your contributions will not increase your taxable income for the year. This can be particularly advantageous if you are close to the threshold for a higher tax bracket.
In conclusion, while a Roth IRA is not applicable in the UK, it is an important retirement savings tool for US residents. It offers a number of advantages over a traditional IRA, including tax-free growth and the ability to withdraw contributions at any time. However, eligibility is restricted by income and contribution limits. As with any financial decision, it is important to consult with a financial advisor to determine the best retirement savings strategy for your individual needs and circumstances