I’ve heard this is something I should get or setup but don’t really know what is it.
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First understand that a savings account is where you put money into the bank and they hold it for you, adding interest based on the current prime rate as set by the government. Right now it’s at like 4%, meaning this year, for every $100 in your account, the bank adds another $4 (33¢ per month). The government will take a portion of that $4 back at tax time; the actual amount they take depends on your total income.
A savings account is better than stuffing cash in a mattress, but your money grows very slowly, and doesn’t really keep up with inflation (rising cost of living). Nevertheless, it does keep going up, if you don’t touch it.
There’s a special kind of savings account called a CD (certificate of deposit, not compact disc), where you deposit a standard amount and get slightly higher interest rates, but you have to keep the money in there for a certain amount of time or they make you pay a big penalty.
A Roth IRA is a sorta like that, but it’s a personal retirement *investment* account. Like a savings account, you deposit your already-taxed cash into it at your convenience. There are limits on how much you can put in and take out, and when. Also, there’s no interest. Instead, to make it grow, you convert most of the money into investments (e.g. stocks in the stock market), which you are free to choose, but which you don’t get to actually keep.
As far as you’re concerned, your account then contains a certain amount of money, which is not the cash “principal” you put into it, but rather just the value of the investments. So the amount of money in your account generally rises and falls with the stock market and the overall economy.
It’s risky. A broker can help you tailor your portfolio according to how much risk you’re willing to take, but no portfolio is totally recession-proof. That said, the idea is you just keep adding to it, and you ride out the dips in the economy, and hopefully when you’re old, you’ll end up with a nice profit. Most people get like 7% to 10%. That means for every $100 they put in, they ended up with an extra $7 to $10 of “free money”.
I wouldn’t say having a Roth IRA is something you “should” have. But having *some* kind of retirement savings is generally considered a good idea.
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