What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to contribute money on an after-tax basis. Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible, but the advantages come when you withdraw funds in retirement.
Key Features
- Tax-Free Growth: Earnings grow tax-free, and qualified withdrawals are also tax-free.
- Contribution Limits: For 2023, the maximum contribution limit is $6,500 per year ($7,500 for those aged 50 and over).
- Eligibility: Contributions are subject to income limits. For single filers, eligibility phases out at $138,000, while for married couples, it phases out at $218,000.
Withdrawals
You can withdraw your contributions at any time without penalty. However, to withdraw earnings tax-free, you must meet the five-year rule and be at least 59½ years old.
Benefits
A Roth IRA provides more flexibility in retirement, as you won’t owe taxes on withdrawals, which can help with managing your taxable income during your retirement years.
Conclusion
Overall, a Roth IRA is an excellent option for individuals looking to build a tax-free nest egg for retirement, offering significant benefits for those who qualify.