Are Roth IRAs Connected to the Stock Market?
A Roth IRA is not specifically tied to any market, whether it be stock, bonds, commodities or any other investment vehicle. A Roth IRA is an individual retirement arrangement established by the federal government in 1998 to encourage savings outside of Social Security for retirement. Brokerage houses, banks, credit unions, insurance companies and any other financial institution can offer Roth IRAs as long as the investment vehicle is IRS approved.
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Roth IRA
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The Roth IRA itself is a tax-free retirement savings plans. After-tax income can be contributed to the plan throughout a worker's career. Beginning at age 59 1/2, the contributions and the returns on the account can be distributed or withdrawn from the Roth IRA. There is no tax liability on gains in the account. The savings is only taxed once.
Contributions
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Contributions are limited, as of 2009, to $5,000 per individual and $6,000 if over age 50. In certain instances, catch-up distributions can be made. The income limits for participating in a Roth IRA are generally $177,000 for a married couple and $120,000 for a single person.
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Distributions
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Distributions to the account can be made under certain circumstances before age 59 1/2. Contributions, but not returns on investments, can be withdrawn with no penalty. Money earned in the account can be distributed early with a 10 percent tax penalty. Some distributions, such as for the purchase of a main residence or a one-time contribution to a health savings account, can be made with no penalty. Congress determines the tax treatment of distributions.
Investment Vehicles
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There are a variety of examples of investment vehicles not tied directly to stock markets. Insurance annuities are one such vehicle. Another might be a money market or other basic savings account. Real estate can be held in some IRAs as well as bonds. The most common form taken is a mutual fund that may hold all of these at one time. Diversification in any investment portfolio helps hedge against risk.
Personal Needs are Key
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When shopping for a Roth IRA, the personal needs of the owner are key to determining the right mix of investments. Older investors may prefer stable income versus more risky investments. Younger savers, who can tolerate more risk, may prefer to be heavily invested in equities such as stocks because of the higher returns. They can also better weather price fluctuations. Something else to consider is that traditional IRAs require distributions to be made over a certain period of time. A Roth IRA does not. For an older investor still earning, this may reap some tax savings.
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References
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