A Roth IRA is a savers best friend. Learn how Roth IRAs work, why theyre so great and if youre eligible to contribute.

Ready to start investing on your own? Then a Roth IRA is the first place to look.

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Before I took a job at SmartMoney Magazine. terms like 401(k), Traditional IRA, and Roth IRA were all investorbabble to me. I didnt know what they were andto be quite honestat 22 and with no financial smarts of my own, I didnt really care. I was in a ton of debt (and I was 22), so I didnt see retirement as a real priority.

Today, its a different story. Ive learned a lot (with a little patience, leaning the rules of retirement investing wasnt that difficult) AND Ive since gotten out of debt and realized just how critical it is getting a jump on saving for the future. And the absolute best way to do that, in my opinion, is with a Roth IRA.

WHAT IS A ROTH IRA?

A Roth IRA is a type of individual retirement savings account with one extremely attractive tax benefit: Your contributions and interest earnings grow tax-free and, at retirement, withdrawals are 100 percent tax-free.

This benefit distinguishes the Roth IRA from the traditional IRA, in which contributions are tax deductible, but withdrawals are taxed at retirement time. If you can get money into a Roth IRA at an early age and let it grow for 25 or 30 years, youll earn a lot of money in interest tax-free !

But why is a Roth IRA better than a traditional IRA? Because, for two reasons, youll usually end up paying less taxes on a Roth:

• Many investors will be in a higher tax bracket in retirement than they are now, meaning its better to pay less taxes on the money you invest now rather than more taxes on money you take out later. (The exception to this rule might be a high-earner who plans to retire early and live very frugally for many years).
• Taxes probably arent going down. If anything, taxes will go up before we all retire, meaning its better (again) to pay the lower tax rate now instead of higher taxes later.

OTHER BENEFITS TO A ROTH IRA

Another reason Roth IRAs are great is because IRAs have a leg-up over the 401(k) plans you may have at work. Unlike 401(k)s, IRAs let you invest your money virtually anywhere: mutual funds, exchange-traded-funds, individual stocks, or even cash money market accounts. Just pick your favorite broker and youre off.

When you make IRA contributions, your goal is to leave that money untouched until retirement so it can reap compound returns year after year. Another perk of the Roth IRA, however, is that you can withdraw your contributions at anytime, tax-free, and with no penalties (unlike traditional IRAs and 401(k) accounts). This allowance applies to your contributions only, not the interest you earn, which is subject to the same federal taxes and 10 percent penalties as withdrawals from traditional IRAs and 401(k) accounts.

One final perk is that you can use up to $10,000 in contributions (and earnings) tax-free and penalty-free from a Roth IRA to purchase your first home. The only requirement is that your IRA account must have been open for five years.

ROTH IRA CONTRIBUTION LIMITS

There are federally-imposed limits on how much you can contribute to an IRA each year for 2014  and 2015 the limit is $5,500 per year for everybody 50 and under.