If you’re trying to become a better, more financially responsible adult, you definitely need to learn about and understand your IRA. Without a doubt, it can be daunting to think about, especially if you don’t have any prior knowledge, but this is a subject that you can’t afford to ignore. Learning about your IRA is a necessity, especially since your contributions play a major role in your retirement plan. Although it’s more convenient to let your employer deal with your Roth IRA and everything that has to do with it, it’s highly recommended that you actually understand how this is calculated.
What Is a Roth IRA?
Let’s first start with the basics: what is a Roth IRA? This is considered a newer, more updated type of IRA that invests a portion of your income without tax breaks. Consequently, this also means that Roth conversions allow you to make withdrawals that are free of tax. If your employer happens to send your IRA to a Roth account instead of the traditional one, you can expect that any profits made from investments through taxable income won’t be taxed.
This is the major factor that makes Roth IRA different from the traditional IRA that many people are familiar with. That being said, they essentially function and behave the same way except for that primary feature.
Do You Have One?
So, at this point, you’re probably wondering whether you have a Roth IRA. In this case, you’ll find the answer to your query by asking one of your co-workers what kind of IRA accounts and 401k your workplace offers. Other than that, you can also check this information via your tax return. But if you can’t seem to find this data, you can employ the help of a tax professional to assist you further. Because Roth IRA and traditional IRA aren’t too different from each other, many workers may have a hard time telling them apart.
What About a Roth IRA Basis?
You can’t talk about Roth IRA without talking about Roth IRA basis, but what does the latter actually mean? If you have a Roth IRA account, the contributions you make are known as its IRA basis. As mentioned, you are free to withdraw and use the funds without being taxed, unlike traditional IRA, wherein you have to deal with income taxes every time you withdraw money for the purpose of investing.
Roth vs. Traditional
Unsurprisingly, many individuals prefer to have a Roth IRA account rather than a traditional one and choose to transfer their money. If you do so, you must first convert the money, and this could potentially cause you to lose a few funds from the traditional IRA account. This is a downside you have to think about before deciding to transfer accounts.
Naturally, having a good grasp of your IRA is necessary, especially if you plan to invest. Understanding your Roth IRA basis is most especially important because you don’t have to worry about income taxes if or when you choose to trade or invest. If you want to become a more financially responsible adult, this is definitely one of the first steps.