There are many Roth IRA rules you have to be aware of prior to determining if this investment vehicle is for you. Some of them are quite complex, so being fully educated on them is very important. First, you need to understand that an IRA is not an investment in and of itself, and it is merely a vehicle used to make investments. With it, you have a lot of liberty in terms of what you can invest in, whether it is stocks, bonds, mutual funds, etc.
Unlike a 401K, it is much more flexible, because you get to decide what you want to invest in. With a 401k, the company decides for you. However, with a Roth IRA you get to choose your own investments. All you need to do is find a broker to make you investments through, but you get to make the actual investment decisions yourself.
The reality is that it does not matter all that much which broker firm you choose. However, if possible, try to find one with low commission rates, as well as good customer support. The other positive to the IRA, in addition to the flexibility, is the fact that the money grows tax-free. There is no tax applied upon withdrawal, which is not the case with the 401k and traditional IRA.
However, there are negatives to the Roth IRA rules as well. As you might expect, the taxes have to be applied somewhere, and they are done so upon contribution. Quite simply, while you can deduct your contributes to the 401k and the traditional IRA, you cannot with the Roth. The contribution limit is quite low, as you can only put in $5,000 a year, although the number is a bit higher when you hit 50.
In addition, if you are single, you cannot make more than $106,000 a year if you want to use the Roth. If you are married, your joint income cannot be over $167,000. The other negative is that the money is not liquid. The reason is, if you withdraw the funds prior to 59 1/2, you have to pay taxes on them. In other words, if you want the money now, you should just put it in a savings account.
Also, keep in mind that the only thing that is tax-free is the amount that is more than the principle, such as the interest and the dividends. In other words, what you initially deposited is taxed. However, this is still superior to the traditional IRA, where 100% of the contributions are taxable.
In other words, for most people who earn less than the required income amount, the Roth IRA is going to be the best plan. This is because the interest accumulates tax free, and this can end up being a huge sum of money. For this reason, a Roth is probably superior to the traditional IRA. Also, there is more freedom with the Roth than with the 401. Therefore, while there are certainly pros and cons to the Roth IRA rules, overall the good outweighs the bad.
