What is Roth IRA?

A Roth IRA is a type of individual retirement account that can help turn investments into tax-free money. It shares some similarities with the traditional IRAs. The two individual retirement account types offer different taxing models.

Customers holding traditional individual retirement accounts can add pre-tax funds to grow tax-deferred funds. The funds can be accessed once the account holders retire at the income tax rate during the time of the contributions.

Roth IRA funding is done using after-tax dollars. This means that the contributions are not tax-deductible. However, when the account holders retire and wish to withdraw their funds, they can do so tax-free.

That essentially forms the core difference between the two account types – Roth IRAs aren’t taxable while a holder of a traditional IRA has to pay income tax every time they withdraw money. However, the latter receive a tax deduction for contributing to the account before retirement while Roth IRAs already use contributions after-tax.

It is recommended for people who expect their marginal taxes to be higher once they retire to opt for the Roth IRA plan. There are strict limits on the income margins on Roth IRAs. If the taxpayer is filing as a single person, their earnings must be $144,000 or below in 2022. Married couples that file their taxes jointly cannot exceed $214,000 in 2022.