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For more than 10 years, a unique investment vehicle has given some people the chance to accumulate huge amounts of wealth. But until today, many others didn't have access to what may prove to be the most important investing tool you’ll ever find.

That tool is the Roth IRA, and although the name suggests that the Roth is primarily a method to invest for your retirement, it is flexible enough to serve a number of other purposes as well. From giving you a way to save for shorter-term goals to protecting your assets for future generations to come, the Roth IRA is so valuable that you won't want to miss out on the chance to use it in your own financial planning.

All this week, I'll be writing about the Roth IRA and the role it can play in your financial plan. Today, let's take a closer look at exactly what the Roth can do for you -- and why it's getting so much attention right now.

What makes Roths great
Right now, it's hard to remember when financial innovation didn't automatically conjure up feelings of skepticism and distrust. But back in the late 1990s, when the Roth IRA was first created, it ushered in a new way to think about saving for retirement.

Until then, retirement investing was all about tax deferral. Traditional IRAs and 401(k) plans allowed savers to set money aside for the future, giving many of them a current tax break on their contributions. In other words, the government essentially paid you back for part of what you put into a retirement account in the form of a tax deduction. Depending on your tax bracket, that deduction could be extremely valuable as a current benefit, irrespective of whether saving for retirement was your primary goal.

The trade-off, though, was that when you actually used the money, you had to pay taxes on what you took out. From one perspective, then, the U.S. government shared in your investment gains and losses. If your IRA skyrocketed in value, then the IRS would collect more tax. Just look at some of these examples:

If You Invested $2,000 in an IRA 20 Years Ago in This Stock:

It's Now Worth This Much:

And the IRS Could Collect up to This Much in Taxes:

Microsoft (Nasdaq: MSFT  )

$117,231

$41,031

Home Depot (NYSE: HD  )

$37,090

$12,981

United Technologies (NYSE: UTX  )

$31,266

$10,943

ConocoPhillips (NYSE: COP  )

$15,564

$5,441

Apple (Nasdaq: AAPL  )

$47,948

$16,782

Nordstrom (NYSE: JWN  )

$10,129

$3,545

Amgen (Nasdaq: AMGN  )

$101,018

$35,356

Source: Yahoo! Finance. Assumes taxpayer is in top current tax bracket of 35%.

Those tax figures represent a darn good return for the U.S. Treasury, especially when you consider that the upfront deduction on the original $2,000 only cost them $660 or less in tax revenue.

The Roth IRA turned that logic on its end. Rather than giving you a current incentive to save, the Roth pushed the incentive far into the future by making all the growth within your account tax-free. And if you decide to convert an existing traditional IRA into a Roth, then it's even more obvious that the Roth is a different animal than traditional retirement accounts -- because you have to pay tax on the amount you convert.

Opening the door
Until now, though, many investors have been locked out of the Roth IRA. Income limitations prevent many high-income investors from using a Roth IRA, either through annual contributions or by converting existing IRAs to Roths.

Now, though, those income limits on Roth conversions have disappeared. And although high-income earners may still not be able to make their $5,000 annual contribution to a Roth, anyone who has a traditional IRA can choose to convert now.

So the big thing that everyone's asking right now is this: Should you convert to a Roth? That turns out to be a much more complicated question than you might think -- which is why we're going to spend the rest of the week exploring the many issues that come into play in helping you come up with the right answer for you.

Stay tuned the rest of this week as Dan looks into the benefits of the new Roth conversion. Tomorrow: Why converting to a Roth might be the smartest money move you'll ever make.

Fool contributor Dan Caplinger made his first Roth IRA contribution in 1998 and has never looked back. He doesn't own shares of the companies mentioned in this article. Home Depot and Microsoft are Motley Fool Inside Value selections. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call strategy on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is always on the lookout for big things.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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