A Roth IRA (Individual Retirement Account) is a type of retirement savings account that offers potential tax advantages to individuals in the U.S. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning you've already paid taxes on the money before it goes into the account.
The earnings and investment gains within a Roth IRA grow tax-free. You won't owe any taxes on the capital gains, dividends, or interest earned within the account, as long as you meet certain requirements. You can invest various financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more, depending on the brokerage or financial institution that holds the account.
When you reach the age of 59½ and have held the Roth IRA for at least 5 years, you can make tax-free withdrawals of both your contributions and the accumulated earnings. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) during the account holder's lifetime. This allows you to maintain the funds in the account and potentially pass them on to your heirs without being forced to take withdrawals.
While the primary purpose of a Roth IRA is for retirement savings, you can also withdraw your contributions (but not earnings) penalty-free before retirement age for certain qualified reasons, such as a first-time home purchase or qualified education expenses.
Roth IRAs have income eligibility restrictions and contribution limits that may vary based on factors such as your marital status and modified adjusted gross income (MAGI). For 2023, the contribution limit is $6,500 if you're under 50 and $7,500 if you are 50 or older.