A Roth IRA is a tax-advantaged individual retirement account. Your contributions are made after tax, which means you don’t get an initial tax deduction. But that money and your investment earnings grow tax-free, meaning there’s no income tax when you withdraw from a Roth IRA in retirement.
The Roth IRA’s high points:
It allows contributions of up to $5,500 per year and can be used in addition to a 401(k). Investors 50 and older can contribute an extra $1,000 per year.
Because you’re contributing after-tax dollars, you lock in your current tax rate. This can be a big plus if you expect your tax rate to be higher in retirement, either because you’ll be in a higher tax bracket or you expect tax rates to rise.
Unlike 401(k)s and traditional IRAs, a Roth is not subject to minimum distributions at age 70½. That lets you continue taking advantage of tax-free growth beyond that age.
Because you’ve already paid taxes on contributions, you can withdraw them without tax or penalty at any time. You may, however, be taxed or penalized if you withdraw your investment earnings before retirement.
How to decide if a Roth IRA is right for you
Because of the huge tax benefits of a Roth IRA, there are a fair number of rules, including eligibility requirements based on income. If your adjusted gross income is $196,000 or more as a joint tax filer, or $133,000 as a single filer, you’re not eligible to contribute to a Roth IRA.
If you have a 401(k) that offers matching dollars and you’re not contributing enough to earn them all, that’s where you should direct your retirement savings first. We’d also encourage you to compare the Roth with a traditional IRA. The Roth is a better option for many people, but it’s wise to know the differences before making a decision.
When considering your options, be sure to look at things like investment choice — you’ll want a large selection of no-transaction-fee mutual funds and commission-free exchange-traded funds — account minimum, account fees and customer service.