Roth IRA

An individual retirement account funded with after-tax money, where qualified withdrawals of earnings are tax-free and contributions can be taken out any time.

What it means

A Roth IRA is an individual retirement account with no up-front tax break. Contributions are made with money already taxed, but growth is never taxed if withdrawals are qualified, generally after age 59½ and once the account has been open at least five years. Eligibility to contribute directly phases out above income ranges the IRS sets each year, and the annual limit is shared with traditional IRAs.

Because contributions were already taxed, they can be withdrawn at any time without tax or penalty; only earnings face restrictions. Roth IRAs also have no required minimum distributions during the original owner’s lifetime, which makes them flexible for estate and retirement income planning.

Example

For example, someone contributes $5,000 a year for five years, putting in $25,000, and the account grows to $30,000. They could take out the $25,000 of contributions tax- and penalty-free at any point; the $5,000 of earnings would be taxed and possibly penalized if withdrawn before a qualified withdrawal.

How it’s used

Savers in lower tax brackets today
Building tax-free retirement income
Leaving tax-free money to heirs

Strengths and weaknesses

Strengths

Qualified withdrawals, including growth, are tax-free
Contributions can be withdrawn any time
No required minimum distributions for the original owner
Wide investment choice

Weaknesses

No tax deduction for contributions
Higher earners may be ineligible to contribute directly
Low annual limit
Earnings withdrawn early may be taxed and penalized

Good to know

Converted amounts follow their own five-year rules, separate from regular contributions.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.