How a Roth IRA Works
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Investment Style
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Roth individual retirement accounts (IRA) are investment accounts. Depending upon your age, the type of investment strategy changes. Your IRA account holder will be able to more thoroughly explain your strategy options. These options include investing in stocks, bonds and mutual funds. The amount you invest in each category reflects your investment strategy. Your investment is then pooled with other Roth IRA investors' money to achieve increased portfolio diversity and lower purchase prices. Stocks, bonds and mutual funds may have minimum purchase requirements to take advantage of lower prices; these minimums cannot be achieved by the average investor, thus pooling the money allows for an advantage.
Contributions
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How much you are allowed to contribute per year without incurring any taxes is dependent upon your age and income. Money can be contributed to your Roth IRA account by yourself or your employer. Contribution limits can be based on total dollar amounts, percentage of your earned salary and employer matching, for instance. Although you can receive contributions in many ways, the limits still apply. If contributions exceed the limits, the excess money will be taxed. Refer to IRS.gov for specific information regarding how much you can contribute (see Resources).
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Taxes
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Roth IRAs do not tax any contributions unless an individual contributes more in a year than allowed, then the excess contribution will be taxed, or monies are withdrawn before maturity date (retirement age, check IRS.gov for age requirements). When age requirements are met, withdrawals will be taxed as income. Be aware that there are several caveats to the rule, and they are outlined on IRS.gov.
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