A Roth IRA is a special retirement account that you fund with post-tax income (you can’t deduct your contributions on your income taxes). Once you have done this, all future withdrawals that follow Roth IRA regulations are tax free.
There is no up-front tax deduction for Roth IRA contributions, as there is with a traditional IRA. On the other hand, Roth distributions are tax-free when you follow the rules. And because every penny you stash in a Roth IRA is your money—not a tax-subsidized gift from Uncle Sam—you can tap your contributions (but not your earnings on those contributions) at any time, tax-free and penalty-free.
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to traditional IRA.
- You cannot deduct contributions to a Roth IRA.
- If you satisfy the requirements, qualified distributions are tax-free.
- You can make contributions to your Roth IRA after you reach age 70 ½.
- You can leave amounts in your Roth IRA as long as you live.
- The account or annuity must be designated as a Roth IRA when it is set up.
The same combined contribution limit applies to all of your Roth and traditional IRAs. Your Roth IRA contribution might be limited based on your filing status and income.
Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate. That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and will benefit from decades of tax-free, compounded growth.
Roth IRAs also appeal to anyone who wants to minimize their tax bite in retirement, as well as older, wealthier taxpayers who want to leave assets to their heirs tax-free. (Unlike Traditional IRAs, there are no required minimum distributions [RMDs] on Roth IRAs, so well-funded retirees can leave their Roth money untouched if they don’t need it.)
You can contribute to a Roth IRA at any age as long as you have earned income from a job. That means they are appropriate for everyone from child actors to septuagenarian Wal-Mart greeters.
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
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