Roth IRA’s in a nutshell:
The IRA can be setup at a bank or brokerage or other financial institution.
A Roth IRA works by contributing money each year to the retirement account. The money that you contribute is “after-tax”, meaning all taxing authorities have already taken their cut of the pie on it.
Currently, the maximum per year an individual can contribute to a Roth is $5,500 to the account, or $6,500 if they are over age 55. This amount may increase in future years with inflation. This yearly cap does hurt those who wish to put in more but are prohibited from doing so. You must also “earn” at least the amount you want to put into the Roth IRA each year. So you must have W-2 or 1099 or other “earned” income (not investment income) of at least $5,500 currently to contribute that amount to a Roth. You can contribute to the Roth at any time during the year, and up to April 15th of the following year. So, if you want to contribute to a Roth next March, you can choose whether you want that contribution to be applied to 2013 or 2014.
There are also income limits to be eligible to contribute to a Roth. Currently, for single taxpayers, Modified Adjusted Gross Income (calculated on your yearly tax return) can be no more than $127,000 (and the maximum contribution begins to be reduced at $112,000). For Married filing Joint, the income limit is $188,000 (and starts to be reduced at $178,000). If your income is over these amounts, you cannot contribute to a Roth in the year that your income exceeds those amounts. Any prior Roth contributions are fine.
Once the money is in the Roth IRA, you can direct the funds to be invested any way that you would like. Any earnings on the account in the form of dividends or capital gains are not subject to tax. When you contribute funds each year you do not get any sort of tax deferral or tax deduction, however, which is different than Traditional IRA’s and other retirement plans.
Once you reach age 59 and 1/2, you can start to withdraw funds from the Roth without a penalty. If you withdraw funds before age 59 and 1/2, you have to pay a 10% penalty on the amount of any earnings (not principal, since that has already been taxed) distributed. Once past age 59 and 1/2, all distributions are completely tax-free. You are not required to start taking money out of the Roth until you reach age 70 and 1/2, however. At that time you are required to start taking required minimum distributions (RMD’s) which are based on the value in your account and actuarial tables.
The biggest benefits of a Roth compared to other retirement plans is that you do not have to pay any tax on the distributions once you take them out in retirement. You are also able to invest the money in the Roth any way that you see fit, as aggressively or conservatively as you like.
At your age, a Roth is usually a very good retirement vehicle, especially if you also have an employer-sponsored retirement plan you can contribute to as well, as the yearly cap on Roth contributions makes it difficult to build up a really large retirement account using just a Roth.
Hope that helped.