A Roth IRA is a retirement planning option that was established in 1997 to provide additional options for those wishing to invest for retirement. When you invest in a Roth IRA, you make after-tax contributions (meaning you receive no tax benefits in the year of the contribution). A Roth IRA’s growth and earnings are tax-free upon withdrawal, assuming certain conditions are met.
Roth individual retirement account contribution limits are currently $5,500 annually (or up to 100% of earned income, if lower) or $6,500 annually for those over 50 years of age (this is referred to as a “catch-up contribution”). Contributions are made after-taxes and offer no tax benefits in the year of contribution. However, growth and earnings accrue tax-free, assuming certain conditions are met. There are income restrictions related to eligibility to receive tax benefits of Roth IRAs (either full or partial). There are no Roth IRA contribution minimums, although some plans require a minimum to initially open a Roth IRA account.
- Tax-free growth – Since Roth IRA contributions are made with after-tax income, any potential growth that accrues during the investment period is not subject to additional income tax.
- Tax-free withdrawals – Distributions from Roth IRAs are tax-free, assuming that certain criteria are met. Accounts must be open for a minimum of five years and withdrawals must occur after age 59 ½ (or after death, disability or for a qualified first time home purchase) in order for this benefit to take effect.
- No required minimum distributions – Roth IRA owners are not required to make withdrawals at a certain age, and any assets that remain in the account upon death can be transferred to heirs.
- Fewer withdrawal restrictions than traditional IRAs – Direct contributions can be withdrawn at any time (tax-free); earnings can be withdrawn tax-free when conditions of tax-free withdrawals (see above) are met.
- Multiple retirement plans – After-tax contributions can be made to a Roth IRA even if the owner is covered by another qualified retirement plan (such as an employer-sponsored 401(k).