Roth IRA Benefits
A Roth IRA is a retirement account where contributions are made with after-tax dollars, but all withdrawals in retirement are completely tax-free. Unlike traditional IRAs and 401(k)s, you don't get a tax deduction now, but you never pay taxes on the growth - potentially worth hundreds of thousands in tax savings. The 2024 contribution limit is $7,000 ($8,000 if 50+).
Roth IRAs are especially powerful for young investors in low tax brackets. A 25-year-old contributing $6,500 annually until 65 at 8.5% returns will have nearly $2 million - all tax-free in retirement. If this were a taxable account at 22% tax rate, taxes on the $1.7 million in earnings would be $380,000. That's enormous savings for money you already paid taxes on.
Roth IRAs have unique advantages: no required minimum distributions (RMDs) at 73 like traditional IRAs, contributions (not earnings) can be withdrawn anytime penalty-free, and you can pass tax-free wealth to heirs. Income limits apply ($161,000 single, $240,000 married in 2024), but high earners can use the 'backdoor Roth' conversion strategy.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Roth is better for younger workers in low tax brackets now who expect higher brackets in retirement. Traditional is better for high earners in peak earning years. Many people have both for tax diversification.
You can withdraw contributions (not earnings) anytime tax and penalty-free. Earnings can be withdrawn tax-free after age 59½ and account is 5+ years old. Early earnings withdrawals face taxes and penalties.
Use the 'backdoor Roth' strategy: contribute to a traditional IRA (no income limits), then immediately convert to Roth. Be aware of pro-rata rules if you have other traditional IRA balances.
Contribute to 401(k) up to employer match first, then max Roth IRA, then back to 401(k). This prioritizes free money, then tax-free growth, then more tax-deferred savings.
Yes, they're separate accounts with separate limits. You can contribute $7,000 to Roth IRA and $23,000 to Roth 401(k) in 2024 if eligible, providing massive tax-free growth potential.