Roth IRA
A Roth IRA is a retirement account funded with after-tax dollars that grows tax-free and allows tax-free withdrawals in retirement, with no required minimum distributions.
Exam Tip
Roth = pay taxes NOW, tax-free LATER. No RMDs. 5-year rule for qualified withdrawals.
What is a Roth IRA?
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Unlike a Traditional IRA, you contribute money you've already paid taxes on.
Key Advantages
| Benefit | Description |
|---|---|
| Tax-Free Growth | No taxes on investment gains |
| Tax-Free Withdrawals | Qualified distributions are 100% tax-free |
| No RMDs | No required minimum distributions at any age |
| Flexibility | Contributions can be withdrawn anytime tax-free |
Roth IRA Rules
Contribution Rules:
- Must have earned income
- Income limits apply for eligibility
- Can contribute until tax filing deadline
Withdrawal Rules (Qualified):
- Account open 5+ years AND
- Age 59½+ OR first home purchase ($10k max) OR disability/death
Roth Conversion
You can convert a Traditional IRA to a Roth IRA. You'll pay taxes on the converted amount, but future growth and withdrawals are tax-free. This is called a "backdoor Roth" when done to bypass income limits.
Roth IRA vs. Traditional IRA
| Factor | Roth IRA | Traditional IRA |
|---|---|---|
| Tax break | At withdrawal | At contribution |
| Best if | Tax rate higher in retirement | Tax rate lower in retirement |
| RMDs | None | Starting at 73 |
Study This Term In
Related Terms
IRA (Individual Retirement Account)
SecuritiesAn IRA is a tax-advantaged personal retirement savings account that individuals can open independently, offering either tax-deductible contributions (Traditional) or tax-free withdrawals (Roth).
401(k)
SecuritiesA 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, with potential employer matching, and tax-deferred growth until withdrawal.