The thing that holds many people back from switching from their traditional retirement account is their lack of understanding of the Roth IRA rules.
Many people do not even know what the definition of a Roth IRA is, or even who was the one that came up with this brilliant investment idea first.
It was Delaware Senator William Roth who in 1996 sponsored legislation that resulted in the birth of the Roth IRA rules.
Because Senator Roth presented this popular bill before the Senate, his colleagues named the retirement plan in his honor.
To understand the definition of a Roth IRA you must familiarize yourself with other retirement plans born under the ERISA act, which was fundamentally revised in 1974.
While the rules for this particular retirement account have many likenesses with the other, there are many drastic differences also.
Under the Roth IRA rules, the money that you put into the account is taxed every year as though it was a part of your annual salary.
This is different to the approach that prevails under the traditional retirement accounts in that they tax your contributions until you are ready to use the money for your retirement.
This is where the definition of a Roth IRA comes in handy.
A traditional retirement account will tax you on every last dollar that you have both put into the account.
You will also see taxes on gains you receive on your investments in the account.
In contrast, the Roth lets you keep your earnings untouched.
This pay-as-you-contribute scheme started with these rules because many people were projected to have the possibility of losing a much bigger share of their overall investment dollars by being taxed in the end.
This is because of the fact that most people would have achieved a much higher tax bracket when they were eligible to collect, as opposed to where they were when they started.
This may not always be true because many people have to withdraw their funds before retirement for health or other personal emergencies.
By the definition of a Roth IRA an investment retirement account would be taxed every year as the investors tax bracket increases.
This means you can take out money in a way that does not hit you with large tax deduction.
It is much easier to plan your withdrawals knowing this information.
Roth IRA rules also allow mostly for the investor to put his or her money into a wider variety of investments than just the traditional money market accounts and mutual funds.
The hottest investment through these accounts currently is the purchase of real estate, and other physical property.
By understanding the definition of a Roth IRA you can see the full extent of the benefits that this plan may have for you and your retirement money.
If you can play your cards right and you seek to take full advantage of the variety of options that are open to you, these IRA rules could work in your favor.