What Is a Roth IRA?

What Is a Roth IRA?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Roth IRA (Individual Retirement Account) is a particular type of retirement account that you can open with most large financial service companies. With a Roth IRA, the money you contribute is after-tax dollars, meaning you have already paid taxes on it. When you retire and start making withdrawals from the account, you do not pay tax on that income. This type of retirement savings can be beneficial for individuals who anticipate being in a higher tax bracket when they retire compared to when they’re working.

Related Questions

1. Who is eligible for a Roth IRA?

Most people can contribute to a Roth IRA. However, there are income limits. For 2022, if you’re single or head of household, the ability to contribute to a Roth IRA starts to phase out above an adjusted gross income of $129,000 and disappears entirely at $144,000. If you’re married and filing jointly, that phase-out occurs from $204,000 to $214,000.

2. What are the contribution limits for a Roth IRA?

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For 2022, the maximum contribution to a Roth IRA is $6,000 per year. If you’re age 50 or older, you can contribute an additional $1,000 for a total of $7,000.

3. Can you lose money in a Roth IRA?

Yes, just like any investment account, you can lose money in a Roth IRA. The funds in the account are typically invested in stocks, bonds, or mutual funds, and their value can go up or down. However, the longer your retirement horizon, the more time you have to potentially recover from any declines.

4. Can you withdraw money from a Roth IRA?

You can withdraw money from a Roth IRA, but it’s best to wait until you’re at least 59 and a half to avoid potential penalties. Also, the account must have been open for at least five years. However, there are exceptions like first-time home purchase, certain education expenses, or certain medical instances.

5. What happens to a Roth IRA when the owner dies?

A Roth IRA can be passed to a beneficiary when the owner dies. The beneficiary then has the option of transferring the assets into an inherited Roth IRA and either take distributions over time or as a lump sum.