What is a Roth IRA?

What is a Roth IRA?

The IRS defines a Roth IRA as an individual retirement plan that is subject to rules that apply to traditional IRA accounts with some special exceptions. There are many rules that apply to Roth IRA accounts that are not present for traditional IRA accounts. See also definition of a Roth IRA.

What is a Roth IRA vs Traditional IRA?

Roth IRAs are often compared to traditional IRAs. While most people open a traditional IRA because it is the most universal and the easiest of the two types of IRAs, some people would rather open a Roth IRA if given the choice. Because of the IRS rules on Roth IRAs, Roth IRAs are viewed by most people as complicated to understand and as a result, less people know exactly what a Roth IRA is, how a Roth IRA works or the implications of contributing or withdrawing from a Roth IRA account.

What is the biggest difference between a Roth IRA and a Traditional IRA?

There are many differences between a Roth IRA and a Traditional IRA but the differences that most people care the most about are:

• Contributions to a Roth IRA are non tax deductible vs Contributions to a traditional IRA are tax deductible

• Distributions from a Roth IRA are tax free vs Distributions from a traditional IRA are usually taxable

While there are also many rules regarding who can contribute and open a Roth IRA account, assuming that an investor qualifies to open both a traditional IRA account and a Roth IRA account, which IRA account is the most beneficial for him or her to open?

Whether an investor wants to open a Roth IRA or a traditional IRA depends on his or her circumstances. If he or she wants to pay tax now so that he or she won't have to in the future, then a Roth IRA may be a better option than a traditional IRA. However, the tax deduction of the traditional IRA helps many taxpayers get their money back from the IRS. If the tax deductions that a traditional IRA gives make a difference in your life, then a traditional IRA may be a better option than the Roth IRA account.

What is a Roth IRA contribution limit?

Like traditional IRA, the Roth IRA contribution limit is the smaller of:

• $4,000 if age under 50 or $5,000 if age 50 or older, and
• taxable compensation for the year

However, Roth IRA does not have the age restriction dictating who can contribute to a Roth IRA whereas traditional IRA does.