Roth IRA
Explanation: A Roth IRA is a type of individual retirement account that allows qualified withdrawals on a tax-free basis provided certain conditions are met. Contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible, but earnings and withdrawals are tax-free. Roth IRAs have income eligibility limits and annual contribution limits set by the IRS.
Example: An individual contributes $5,500 to a Roth IRA. Over time, the investments grow to $50,000. Upon reaching retirement age, the individual can withdraw the $50,000 tax-free, provided they meet the conditions for qualified withdrawals.
Reference Link: For more information on Roth IRAs, visit Investopedia’s Roth IRA.
FAQs:
- What are the benefits of a Roth IRA?
- Benefits include tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions.
- Who is eligible to contribute to a Roth IRA?
- Individuals with earned income below certain income limits set by the IRS can contribute.
- What is the contribution limit for a Roth IRA?
- Contribution limits vary by year and age, with additional catch-up contributions allowed for those aged 50 and older.
- Can contributions to a Roth IRA be withdrawn at any time?
- Yes, contributions (but not earnings) can be withdrawn tax- and penalty-free at any time.
- What happens if you exceed the contribution limit?
- Excess contributions are subject to a 6% penalty unless corrected within a specific time frame.