Roth IRA: A Simple Guide

A Roth IRA is a retirement savings account that you fund yourself, designed to help you build a nest egg for your future. Unlike some other retirement plans, it has unique tax advantages that make it appealing for many people.

Key Features:

Contributions: You put in money that you’ve already paid taxes on (called “after-tax dollars”). For 2023, the contribution limit is:

$7,000 per year if you’re under 50 years old.
$8,000 per year if you’re 50 or older.

These limits can change over time, so it’s a good idea to check the current rules. You can contribute any amount up to the limit each year—it’s flexible!

Tax Benefits: Here’s where the Roth IRA stands out:

Your contributions don’t reduce your taxable income in the year you make them (unlike a traditional IRA or SEP IRA).
However, the money in your Roth IRA grows tax-free, and when you take it out in retirement, you don’t pay taxes on qualified withdrawals—including the growth! To be “qualified,” withdrawals typically need to happen after age 59½, and the account must have been open for at least 5 years.

Growth and Investments: The money you put into a Roth IRA can be invested in various options, like stocks, bonds, mutual funds, or even annuities (more on those later). How your account grows depends on what you invest in. Note: If you invest in things like stocks, the value *can* go down if the market dips—there’s no automatic protection against losses unless you choose specific investments with guarantees.

Withdrawals: When you’re ready to take money out in retirement (after age 59½ and meeting the 5-year rule), the withdrawals are tax-free. This includes both your original contributions and the earnings, as long as the rules are followed.