Tips from Empower: What is a Roth IRA?

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A Roth IRA is a type of individual retirement account. When you have a Roth IRA, you contribute after-tax dollars — up to a certain limit every year.

That money stays in your retirement investment account and can potentially earn investment returns as you work your way toward retirement. 

Roth IRAs are similar to traditional IRAs in many ways, but they come with some differences. Discover exactly how Roth IRAs work, including how to open one, how much you can contribute, and which potential advantages or disadvantages you should be aware of. 

How does a Roth IRA work?

In a lot of ways, Roth IRAs work like some other popular retirement savings plans, such as 401(k)s and traditional IRAs.

Here are some of the similarities you'll find between these types of plans:

  • You choose to put some of your income into these plans now as a way to save for retirement later.
  • The money is a voluntary amount you can contribute each year, and you can change how much you contribute every year.
  • You're limited by the Internal Revenue Code on how much you can contribute in any given year.
  • The money is held in an investment account, so it has the potential  for compound growth through the years. In the end, you hopefully end up with more than you contributed over the years.

Here are a few ways that Roth IRAs are different from other types of retirement plans:

  • You contribute with after-tax dollars, which means you’ve already paid taxes on the money you contribute. There's no deferred benefit that allows you to avoid paying taxes on the amount contributed until you withdraw the money from your account during retirement.
  • Roth IRAs don't have required minimum distributions, which provides a bit more flexibility when it comes to managing your retirement savings.  
  • You can withdraw your contributions at any time without a penalty because you’ve already paid taxes on the contribution amount.

 This is taken from an article published by Empower.  Click to see the full article and others like it. 

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