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Roth IRA

Roth IRA Definition

A Roth IRA is an individual retirement account (IRA) in the United States that provides tax-free growth. A Roth account may be opened through a variety of investment vehicles such as stock or mutual funds. As with all IRAs, there are specific elegibility and filing status requirements required by the U.S. Internal Revenue Service. A Roth IRA's main advantage is its tax structure. Contibutions are made post-tax, but the growth is tax free and does not require individuals to pay taxes again on this money.

It is commonly believed that the advantage of a Roth IRA over a traditional IRA is its tax-free growth. But in fact, given the same effective pre-tax contribution each year, the results are the same. This is because the money that would have been taxed post-growth is effectively taxed pre-growth, and the growth is proportionally less. The real advantage is that the actual contribution limits are the same for a traditional IRA and a Roth IRA, so an individual can contribute more, in pre-tax dollars, to a Roth IRA than to a traditional IRA.

It is named after its chief legislative sponsor, the late U.S. Senator William Roth.

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