What Is a Roth IRA?
A Roth IRA is a type of individual retirement account in the United States. You contribute money that you have already paid income tax on, the money grows tax-free and qualified withdrawals in retirement are not taxed. It is named after a US senator who sponsored the legislation that created it. Roth IRAs are popular with young people, who often expect to be in a higher tax bracket later.
Key features
- After-tax contributions: you do not get a tax deduction now.
- Tax-free growth: investments inside the account are not taxed as they grow.
- Tax-free qualified withdrawals, usually after age 59 and a half and once the account has been open for five years.
- Access to contributions: you can generally withdraw what you put in without tax or penalty, although this reduces your retirement savings.
- No required withdrawals during the owner's lifetime, unlike traditional IRAs.
- Annual contribution limits and income limits, which change, so check the official figures.
Eligibility
You need earned income, such as from a job, and your income must be below certain thresholds to contribute directly. Part-time and summer jobs can qualify. Students with earnings may be able to open one.
Investing inside a Roth IRA
A Roth IRA is an account, not an investment. You open it at a brokerage, bank or other provider, then choose investments, such as index funds, exchange-traded funds, bonds or individual stocks. Fees and fund choice matter.
Roth IRA versus other accounts
| Roth IRA | Traditional IRA | Workplace 401(k) | |
|---|---|---|---|
| Contributions | After tax | Often tax-deductible | Pre-tax, or Roth option |
| Withdrawals | Tax-free if qualified | Taxed as income | Taxed, or tax-free if Roth |
| Employer match | No | No | Often |
Many people use a 401(k) up to the match, then a Roth IRA.
Why students consider it
Starting early gives decades of compound growth. Because students often have low incomes and low tax rates, paying tax now can be attractive. Even small contributions add up.
Cautions
Early withdrawals of earnings can lead to taxes and penalties. The tax code has details and exceptions, so check current rules or consult a tax professional.
Outside the US
Other countries have similar accounts, such as ISAs in the UK and TFSAs in Canada.
Related terms
See 401(k), ISA, TFSA, compound interest and inflation.
Frequently asked questions
Do I need earned income to contribute to a Roth IRA?
Generally yes. You need taxable earned income, such as wages or self-employment income, at least as much as your contribution. Check the current rules.
Can I withdraw contributions before retirement?
You can usually withdraw your own contributions at any time without tax or penalty, but earnings may be taxed and penalized if withdrawn early. Rules have exceptions.
What is the difference between a Roth IRA and a traditional IRA?
Roth contributions are made with after-tax money and qualified withdrawals are tax-free. Traditional IRA contributions may be tax-deductible, and withdrawals are taxed.