Roth IRA

Definition

A Roth IRA is a personal retirement account where contributions are made with money you've already paid taxes on, but all future growth and withdrawals are tax-free. There are income limits (you must earn below a threshold to contribute), and you can't withdraw earnings before age 59 1/2 without penalties (though you can withdraw contributions anytime). The Roth is powerful because it locks in today's tax rate and avoids all future taxes on growth.

Why it matters

A Roth IRA is ideal if you expect higher tax rates in retirement, which many younger workers do. The long-term tax-free growth makes Roth accounts worth more than Traditional accounts for most people under 50. You can also access contributions (not earnings) without penalty, giving you flexibility. Plus, there are no required minimum withdrawals at age 72, so you can let it keep growing tax-free for your heirs. For someone with 40+ years to retirement, the Roth often wins.

Quick example

At age 30, you contribute $7,000 to a Roth IRA. You pay taxes on that $7,000 now. Over 40 years at 8% returns, it grows to roughly $1.6 million. At 70, you withdraw $100,000 for retirement. You owe $0 in taxes on that withdrawal. If you'd used a Traditional IRA, that $100,000 withdrawal would be fully taxable, potentially costing $20,000 in taxes at your retirement tax rate.

The bottom line

Knowing what Roth IRA means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.