What Does a Roth IRA Mean?

Roth individual retirement accounts offer after-tax savings for retirement, but not everyone can take advantage of these benefits. The Internal Revenue Service limits participation to people who have a modified adjusted gross income below the annual limit, which varies based on your filing status.

Function

Unlike traditional IRAs, which are tax-deferred accounts, Roth IRAs offer no tax deduction for contributions. However, when you take qualified withdrawals from a Roth IRA, you do not have to include the amount of the distribution as part of your taxable income.

Timeframe

Roth IRAs permit you to take qualified withdrawals from the account after you satisfy two conditions. First, the account must be open for at least five tax years. Second, you must be either 59 1/2, suffering from a permanent disability or buying, building or rebuilding your first home.

Benefits

Roth IRAs benefit people who expect to pay a higher income tax rate when they take withdrawals than they will for the year in which they make the contribution. When this is the case, the tax-free withdrawal savings outweigh the savings from deducting the contribution.

References

• Internal Revenue Service: Publication 590 (Chapter 2)