Roth IRA Definition
A Roth Individual Retirement Account (IRA) is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The main advantage of a Roth IRA over a traditional IRA is that if you qualify to make contributions, all distributions from the IRA are tax-free.
Roth IRA Key Points
- Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible.
- Once you start withdrawing funds, the money is tax-free, unlike traditional IRAs.
- There is no required minimum distribution (RMD) during the owner’s lifetime, allowing for tax-free growth for a longer period.
- Income limits apply for contributing to a Roth IRA.
- Contributions can be withdrawn at any time without penalty, but earnings may be subject to taxes and penalties if withdrawn before age 59 ½ and if the account is less than five years old.
What is a Roth IRA?
A Roth IRA is a type of individual retirement account (IRA) that offers tax-free growth and tax-free withdrawals in retirement. Roth IRAs are named after Senator William Roth, who was the chief legislative sponsor of this type of IRA in the U.S. Congress.
Why is a Roth IRA important?
Roth IRAs are important because they offer a way for individuals to save for retirement in a tax-advantaged manner. The tax-free withdrawals in retirement can be a significant benefit for many people, especially those who expect to be in a higher tax bracket in retirement than they are in when they contribute to the account.
Who can contribute to a Roth IRA?
There are income limits for contributing to a Roth IRA. In 2021, if you’re single, you must have a modified adjusted gross income of less than $140,000 to contribute to a Roth IRA. If you’re married and filing jointly, your MAGI must be less than $208,000.
When can you withdraw from a Roth IRA?
You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA if you’re under age 59 ½ and you’ve had the Roth IRA less than five years.
How does a Roth IRA work?
You contribute to a Roth IRA with after-tax dollars. This means you’ve already paid taxes on the money you put into the account. Once in the account, your money grows tax-free. When you start making withdrawals in retirement, these withdrawals are tax-free.
