A Roth IRA is a personal retirement account. Contributions are not tax-deductible, but qualified withdrawals can be free of federal income tax.
What it means
Roth IRA stands for Roth individual retirement arrangement. You open it with a financial institution, choose investments, and contribute money that has already been taxed.
The original owner does not have required minimum distributions during life. Contribution eligibility and the amount allowed can depend on compensation, filing status, income, other IRA contributions, and current law.
A simple example
Casey is eligible and contributes $500 a month for 12 months, or $6,000, using after-tax pay. Years later, the account is worth $9,000 after investment growth.
If Casey takes a qualified $9,000 distribution, neither the $6,000 of contributions nor the $3,000 of earnings is included in federal taxable income. If the distribution is not qualified, different ordering, tax, and additional-tax rules can apply. The word Roth does not make every withdrawal automatically tax-free.
What people often miss
Roth IRA contributions share one annual limit with traditional IRA contributions, and higher income can reduce or remove direct contribution eligibility.
The five-year and age rules for qualified distributions are detailed. A Roth conversion and a regular Roth contribution are different transactions.
Three questions worth asking
- Am I eligible to contribute directly this year?
- Which investments will the account actually hold?
- When would a withdrawal be qualified?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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