Roth IRA

Understanding the Roth IRA

A Roth IRA is a type of individual retirement account that differs from traditional IRAs. To fully comprehend the concept of a Roth IRA, it is crucial to first have a grasp of traditional IRAs.

Traditional IRAs are retirement accounts where individuals can contribute dollars before taxes. The investments made within these accounts grow without being taxed until they are withdrawn during retirement. At that point, the withdrawals are subject to taxation based on the current income tax rate of the IRA owner. The key difference with a Roth IRA lies in its tax treatment.

Roth IRAs are funded with dollars that have already been taxed, meaning that contributions are not eligible for tax deductions. However, once funds are withdrawn from a Roth IRA, they are not subject to taxation. In contrast, traditional IRA deposits are made with dollars before taxes, and individuals typically receive a tax deduction on their contributions. Income tax is then paid upon withdrawal of funds during retirement.

The choice between a Roth IRA and a traditional IRA depends on various factors. If you anticipate having higher taxes during retirement compared to your current tax rate, a Roth IRA is generally the more advantageous investment option. However, it’s important to note that individuals with high incomes may not be eligible to contribute to a Roth IRA. In 2021, the income limit for singles is $140,000, while for married couples, it is $208,000. Additionally, contribution limits for Roth IRAs may change periodically. As of 2021, the annual contribution limit is $6,000, with an additional $1,000 catch-up contribution allowed for individuals aged 50 or older. Various brokerage firms, both physical and online, offer Roth IRAs, and many banks and investment companies provide this option as well.