Not many things rhyme with Roth, (sloth, moth), and while giving a recent retirement seminar I was not surprised that many people did not know the many spendors of this tax-advantaged account. So exactly what doth a Roth?
Technically, a Roth is a Roth IRA (individual retirement account), but it can cover so many bases I just call it a Roth. Established in 1997, and named after the senator who legislated for it, you can use this account for retirement, education savings, first time house purchase and an emergency fund.
It works best when used as a retirement vehicle. You put in after-tax money, up to $5,000 a year (2012) select appropriate investments such as index funds, and let the account grow until you retire. In fact, unlike a regular IRA, it can continue to grow well after retirement. The rule that you have to begin making distributions at age 70.5 does not apply to a Roth. Here is the best part, since you have already paid taxes, you never have to pay taxes again, not even on the earnings. Whoo-hoo!
It also works as a last-resort emergency account for those who tend to dip into retirement accounts. Since you have already paid taxes on your contributions, you are always allowed to withdraw them (unlike an IRA) even before age 59.5. It makes your tax life more complicated, which makes it the decision to break into that bank a little more deliberate, but it is available.
You can also withdraw the earnings without penalty (sorry, you will have to pay tax in this instance) for qualified education expenses. This makes it a great way to save for your future children’s or grandchildren’s college expenses, without the worry that the money will be stuck in an education account and you either never have kids or your kids prefer to apprentice or travel or just drink beer and “be happy, jeeze” instead of going to college.
There is one other feature (it just gets better, very exciting in the MoneyNerd community) you can use the money for a first time home purchase. This has a few rules attached, so make sure to dot and cross.
Where do you buy one of these fabulous things? You don’t, you open a Roth (go to a discount brokerage). Once you open, contribute, invest, repeat yearly.