A Roth IRA, or individual retirement account, allows tax payers in a certain income bracket and work status to secure a retirement plan. The rise in the participation of 401k plans shed light on options for entrepreneurs and employees without the same option. Questions soon began to circulate while people sought the answer to what is a Roth IRA and why should I open one?

The plan is subject to withdrawal penalties for five years before becoming eligible for tax-free distribution in some cases. This plan is also restricted to those under 70 and a half years of age. A tax shelter such as an IRA offers a tax deferred way to secure a comfortable income for future living expenses after retirement.

A business savvy individual is going to plan in advance for this time in life. Many employers offer pension plans to employees who opt to participate. Some plan participation include employer contributions of up to a percentage of what the employee contributes. For the individual there are five different types of IRA’s:

• The Traditional IRA
• The SEP IRA
• The Simple IRA
• The Educational IRA
• The Roth IRA

The restrictions attached to IRA’s generally relate to the limitations placed on the amount that can be contributed per year without becoming taxed. The tax and employment status of the individual determines the limitations placed on the chosen plan.

For instance, the Traditional IRA allows for up to $4000 in contributions in a given year for a single person. This type can be tax deductible or non-deductible determined by tax payer status. The account owner can contribute a certain amount to an Educational IRA. The owner is also restricted in the allotment of money to educational resources. The SEP IRA is a good choice for small business owners as it allows the owner to contribute a larger tax-free percentage, although many business owners are starting to choose the Simple IRA in growing numbers. This plan is most similar to a 401k plan.

The benefit of participating in a sponsored 401k plan is the acquisition of an employer contribution, otherwise considered as free money! The benefit to having the IRA version in addition to the saving feature is the option to diversify which is always a very prudent idea.

The ability to establish a portfolio with an IRA without tax penalties is a huge benefit if done properly. This feature allows the owner to make up for the lack of employer contributions with dividends earned from investments. The advice of a qualified professional will educate the owner of the advantages of not only opening and IRA, but including mutual funds to the portfolio for the best outcome in securing a solid financial future. Don’t make the mistake of trying to save money by skipping this step. While you may save on consultation fees, the wrong decision could cost you a great deal of money in the long term.