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Roth IRA
Definition
A Roth IRA is a retirement account where contributions are made with after-tax dollars, allowing tax-free growth and withdrawals in retirement.
Explanation
Roth IRA contributions are not tax-deductible, but qualified withdrawals in retirement are entirely tax-free. In 2024, contribution limits are $7,000 ($8,000 if 50+), with income limits for eligibility. Single filers with MAGI over $161,000 cannot contribute directly.
Roth IRAs are powerful because tax-free growth means you never pay taxes on investment earnings, making them ideal for young investors who expect higher future tax rates.
Example
A 25-year-old contributing $7,000 annually to a Roth IRA earning 8% could accumulate over $1.7 million tax-free by age 65.