What is a Roth IRA?
A Roth IRA is simply the registration you would use to put money into a retirement account for yourself. Roth investments are after tax dollars. This means that you have already paid the taxes on the dollars you invest. In the Roth registration the money grows tax-free and eventually will come out, as long as you follow the rules, tax-free. Distributions on earnings are tax-free after five years and age 59 1/2. Prior to age 59 1/2, a 10% federal penalty tax may apply.
A Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, U.S. Senator William V. Roth Jr. of Delaware, a Roth IRA differs in several significant ways from other IRAs. In contrast to a traditional IRA, contributions to a Roth IRA are not tax-deductible. Withdrawals, however, are usually tax-free. An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside the Roth IRA account (including capital gains, dividends, and interest) do not incur a current tax liability. Withdrawals are generally tax free when the account has been opened for at least 5 years and the owner’s age is at least 59 1/2.
A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined below). It can be either an account or an annuity. Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Set Up. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.
