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Account & Regulation

Roth IRA

A retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free, including all earnings.

What is a Roth IRA?

A Roth IRA is a retirement account where you contribute money you have already paid tax on. In return, all investment growth and qualified withdrawals in retirement are tax-free. It flips the tax treatment of a Traditional IRA.

Key features

  • No up-front deduction: contributions are made with after-tax dollars
  • Tax-free growth: all dividends, interest, and capital gains inside the account are never taxed
  • Tax-free qualified withdrawals: after age 59½ and a 5-year holding period, all distributions (contributions + earnings) come out tax-free
  • Contributions can be withdrawn anytime: you can pull out your contributions (not earnings) penalty-free and tax-free at any time, which makes the Roth more flexible than most retirement accounts
  • Income limits: high earners may be phased out from contributing directly (backdoor Roth conversions are a workaround)
  • No required minimum distributions during the original owner's lifetime

Who benefits most

  • Younger workers expecting higher income and tax rates later
  • Anyone who values tax-free growth over decades
  • Investors who want withdrawal flexibility as an emergency backup
If you can only choose one retirement account and you have decades ahead, a Roth IRA is hard to beat. Pay the tax once, let it grow tax-free forever.

Related Terms

401(k)

An employer-sponsored retirement plan where employees defer part of their salary into tax-advantaged investments. Contributions are pre-tax, growth is tax-deferred, and many employers offer a matching contribution.

403(b)

A retirement plan for employees of public schools, universities, churches, and certain nonprofits. Similar to a 401(k) in structure and contribution limits, with investments typically in annuities or mutual funds.

457(b)

A deferred compensation plan for state and local government employees and some nonprofits. Separate contribution limit from 401(k) and 403(b), and no early withdrawal penalty at separation of service.

Backdoor Roth

A two-step workaround that lets high earners get money into a Roth IRA despite the income limit: contribute non-deductibly to a Traditional IRA, then convert it to a Roth. Pro rata rule is the main trap.

Capital Gains Tax

Tax owed on profits from selling investments. Short-term gains (held under 1 year) are taxed as ordinary income. Long-term gains (held over 1 year) get lower rates.

HSA

A Health Savings Account: a triple-tax-advantaged account for medical expenses. Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free. Often used as a stealth retirement account.