Definition
Roth IRAs offer tax-free growth and tax-free qualified withdrawals in retirement. Contributions are made with after-tax dollars (no deduction), but all earnings and withdrawals are tax-free after age 59½ (if the account is 5+ years old). Roth has no required minimum distributions (RMDs), making it excellent for estate planning. Income limits restrict direct contributions for high earners.
lightbulb Example
A 25-year-old contributes $7,000/year to a Roth IRA for 40 years at 8% annual return. Total contributions: $280,000. Account value at 65: $1.94M. The entire $1.66M in gains is withdrawn tax-free in retirement.
verified_user Key Points
- Contributions are after-tax (no deduction)
- Qualified withdrawals are completely tax-free
- No required minimum distributions
- Income limits apply for direct contributions