Definition
A Roth IRA is an individual retirement account funded with after-tax dollars that grows and is withdrawn tax-free in retirement.
How It Works
Contributions are not deductible, but qualified withdrawals, including all growth, are tax-free. Direct contributions are limited by income, and annual contribution caps apply.
Example
A young professional contributes to a Roth IRA, and decades of growth come out entirely tax-free in retirement.
When It Works Best
It works best for those who expect higher tax rates later or who value tax-free growth and no required minimum distributions during their lifetime.
Who It Applies To
Individuals with earned income below the contribution limits, or higher earners using the backdoor approach.
Watch-Outs
High earners exceed the direct contribution limits and must use a backdoor Roth, which carries pro-rata complications.
