A Roth Individual Retirement Account (IRA) is a type of retirement savings account that allows individuals to save after-tax money for their retirement. The closest UK equivalent of a Roth IRA is an Individual Savings Account (ISA).
The United Kingdom has a different retirement savings system compared to the United States. However, personal savings rates in the United Kingdom and the United States are very close. Savings rates in the UK averaged 8.34 percent from 1955 until 2022. Similarly, rates in the United States averaged 8.95 percent in the same period.
Roth IRA is an individual retirement account designed to help people save for retirement. The key feature of a Roth IRA is that the contributions and the earnings on those contributions can grow tax-free. Also, no tax is payable on money withdrawn after a certain age.
In other words, after-tax money goes into a Roth IRA, and then all future withdrawals are tax-free.
As a US resident, if you earn less than $122,000 a year and you’re younger than 70, you can open a Roth IRA and contribute up to $6,000 each year.
Roth IRA: Is There A UK Equivalent?
Individual Savings Account (ISA) is the UK equivalent of a Roth IRA. Just as in the Roth IRA, payments into an account are made from after-tax income, then contributions and the earnings on those contributions can grow free of income and capital taxes. However, there is a maximum limit you can save in ISAs every tax year. In the 2022 to 2023 tax year, the ISA allowance is £20,000.
You don’t need to pay tax on interest on cash in an ISA and income or capital gains from investments in an ISA up to this limit. The funds in an account can also be withdrawn tax-free.
4 Types of ISA
Cash ISA
A cash ISA is a tax-free savings account where you add money that you won’t need for the short term. Return rates on cash ISAs are typically lower than those for stocks and other investments. It is a low-risk, low-return type of investment option. Unlike other types of investments, the value of your savings can’t go down with cash ISA. However, if inflation soars unexpectedly, it may eat the real value of your investment while the nominal value seems to increase.
Cash ISAs can include savings in the bank and building society accounts and some National Savings and Investments products.
Stocks & Shares ISA
If you’re looking for the UK equivalent of a Roth IRA, stocks and shares ISAs are another type of account you can open. These investments allow you to put money towards a variety of stocks, ETFs, government and corporate bonds, and other financial products, which can help you grow your savings.
You can open a stock and share ISA at a traditional bank, investment broker, or online investment platform.
Innovative Finance ISA
Innovative finance ISA allows investment in an asset called peer-to-peer (P2P) loans. The innovative finance ISA is a tax-free investment option.
Innovative finance ISAs include peer-to-peer(P2P) loans. P2P lending is a type of peer-to-peer finance that is growing in popularity. With this type of lending, individuals lend money to other individuals or businesses without traditional intermediaries(banks) and earn interest on their investments.
Innovative finance ISAs can include ‘crowdfunding debentures’ which means investing in a business by buying its debt.
Lifetime ISA
Lifetime ISA (also known as LISAs) allows you to save money tax-free, in a way that suits your individual needs. It can be used to save for your first home or retirement. If you set up and put money into Lifetime ISA, the UK government will contribute with a 25% bonus to your savings up to £1,000 per every tax year. You can only pay £4,000 into your Lifetime ISA in a tax year. Lifetime ISAs may include cash, stocks, and shares. Unlike other ISA types, LISAs have an age limit. You need to set up and make your first payment into an account before you’re 40.
How Do You Open an ISA Account?
Whether you choose an innovative finance ISA, stocks and shares ISA, or another type of account, the first step is to open an account. You can do this at traditional banks, building societies, credit unions, friendly societies, stock brokers, or easy-to-use online investment platforms.
There are a few things you’ll want to keep in mind when deciding which stocks and shares ISA to open. You need to make sure that the company you choose is regulated by the Financial Conduct Authority. This will ensure they are a trustworthy company that invests your money correctly.
Then, you want to make sure that the ISA offers a diverse portfolio so you can protect your savings against the risk of loss.
Once you have an account open, you’ll want to make sure you understand how your investment works. This will help you avoid any costly mistakes that could impact the amount of money you have for retirement in the future.
Now that you know what an ISA account is, you can explore the different types and find the one that best meets your needs. Also, you’ll want to make sure to contribute as much as possible each year so you have a nice nest egg for retirement.
Self-invested Personal Pension (SIPP)
Self-Invested Personal Pension, or SIPP can be considered another British equivalent of a Roth IRA. Like a Roth IRA, a SIPP allows you to save for retirement on a tax-advantaged basis.
SIPP is a type of pension scheme that gives you more control over how your money is invested. With a SIPP, you can choose from a wide range of investments, including stocks, shares, and even commercial property. In addition, you can make deposits and withdrawals at any time, giving you greater flexibility than with other types of pension schemes. SIPPs are becoming increasingly popular in the UK, as they offer a number of advantages over traditional pensions.
For example, SIPPs offer tax breaks on your investment income and gains, making them an attractive option for higher-rate taxpayers. Capital Gains Tax (CGT) isn’t payable on profits from the sale of investments held in a SIPP.
In addition, SIPPs can be used to generate income in retirement, making them a flexible and tax-efficient way to save for the future.
Conclusion
There are several retirement accounts available in the United Kingdom that might be considered Roth IRA equivalents. We recommend researching each of these types of accounts and finding out how much you can contribute each year. This will help you grow your retirement savings in a tax-efficient way and be better prepared to live your golden years.
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