What Is a Roth IRA?
A Roth IRA is a US retirement account you open yourself. You put in money you have already paid tax on, and in retirement your qualified withdrawals, including all the growth, are tax-free.
How a Roth IRA works
You open one at a broker, add money up to a yearly limit, and invest it in stocks, funds or bonds. The growth is never taxed if you follow the rules.
Main rules
- You need earned income, like a salary.
- There are yearly contribution limits.
- High earners may not be allowed to contribute directly.
- Growth is generally tax-free if you are 59½ or older and the account is at least five years old.
- You can take out your own contributions (not growth) at any time.
Roth vs traditional IRA
A traditional IRA may give you a tax break now, but withdrawals are taxed later. A Roth gives no break now, but tax-free money later. Roths tend to suit younger people who expect higher income in the future.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
401(k)A US retirement account through your job.
Capital gains taxTax on the profit when you sell.
Compound interestGrowth that earns more growth.
Brokerage accountThe account you use to buy stocks.
Index fundA fund that copies a market index.
Dollar-cost averagingInvesting the same amount on a regular schedule.