What is a Roth IRA?
A is a savings roth is a that offers tax-free withdrawals in retirement. It turns the traditional up-front tax break of a traditional IRA or 401(k) on its head by saving after-tax dollars that then yield tax-free distributions in retirement. The account owner can choose to withdraw the contributions and any earnings at any time without owing income taxes or a 10% penalty. The only rule is that the money has to have been in the account for at least five years, though you can withdraw any amount you’ve invested at any age with no penalty if you need it for a qualified reason such as purchasing a first home or paying education expenses.
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A Roth IRA can be opened through a brokerage or robo-advisor that specializes in managing retirement investments, or by yourself with your favorite bank or investment advisor. If you opt to use a robo-advisor, the service will pick a diversified investment portfolio for you based on your chosen target asset allocation (the mix of stocks, bonds, cash and other safe assets). If you’re a hands-off investor, you can invest in index mutual funds or ETFs directly through an online broker or a reputable fund company.
As with traditional IRAs, the contribution limit for a roth is $6,500 per year, or $7,500 if you’re 50 or older. However, the ability to contribute to a roth may be phased out if your adjusted gross income is above $198,000 for joint filers and $129,000 for singles. You can also open a self-directed roth, which gives you the option to invest in a more diverse array of vehicles, including real estate, promissory notes, private placement securities and cryptocurrencies.