A Roth IRA is a special type of retirement plan where qualified distributions are tax free.
A person can contribute after-tax income up to a specified amount each year. Earnings on the account are tax-free and tax-free withdrawals may be made after age 59 ½ and the account has been established for 5 years.
The Roth IRA, rather than receiving a tax deduction on contributions, all of the qualified distributions come out 100% tax free. Earnings on the account are tax-free, and tax-free withdrawals may be made after age 59 ½.
The Roth Individual Retirement Account (IRA) is one of a number of plans allowed under the tax law of the United States that allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, the late Senator William Roth of Delaware.
The Roth IRA’s principal difference from most other tax advantaged retirement plans is that, rather than granting a tax break for money placed into the plan, the tax break is granted on the money withdrawn from the plan during retirement, there is no upfront tax break.
Not having a tax break up front can have its benefits, as you are not required to pay taxes as you withdraw once you meet retirement age. Roth IRAs are more flexible than traditional IRAs.
Established by the Taxpayer Relief Act of 1997, a a Roth IRA can be self-directed containing investments in securities, usually common stocks and bonds, often through mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible).
As with all IRAs, the Internal Revenue Service mandates specific eligibility and filing status requirements. A Roth IRA’s main advantages are its tax structure and the additional flexibility that this tax structure provides.
Also, there are fewer restrictions on the investments that can be made in the plan than many other tax advantaged plans, and this adds somewhat to the popularity, though the investment options available depend on the custodian (or the place where the plan is established).