Finance Dictionary
Roth IRA
Definition
An individual retirement account allowing a person to set aside after-tax income up to a specified amount each year.
Deep Dive
A Roth IRA (Individual Retirement Account) is a powerful retirement savings vehicle that allows individuals to contribute after-tax income, meaning the contributions themselves have already been taxed. The standout feature of a Roth IRA is that all qualified withdrawals in retirement, including both contributions and any investment earnings, are completely tax-free. This offers a significant advantage for those who anticipate being in a higher tax bracket during their retirement years compared to their working years, as they pay taxes now rather than later.
Examples & Use Cases
- 1A 25-year-old contributing the maximum annual limit to their Roth IRA each year, allowing their investments to grow tax-free for decades until they retire.
- 2An individual using their Roth IRA to save for a first-time home purchase, leveraging the ability to withdraw their contributions without penalty for specific qualifying expenses.
Related Terms
Traditional IRA401(k)Retirement Planning