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Roth IRA

Roth IRAs are generally the best investment option when you think your taxes will be higher in retirement than they are now.

What Is a Roth IRA?

Roth IRAs are similar to traditional IRAs, so let's cover them first. 


Traditional IRAs are individual retirement accounts that allow individuals to contribute pre-tax dollars to a retirement account where the investments grow tax-deferred until they are withdrawn throughout the retirement. Upon retirement, the withdrawals are taxed at the IRA owner's current income tax rate. The main difference in a Roth IRA is in the way it is taxed.


You see, Roth IRAs are funded with after-tax dollars, and the contributions are not tax-deductible. Once you start withdrawing the funds, however, the money is tax-free. Traditional IRA deposits are made with pre-tax dollars, and you typically get a tax education on your contribution and end up paying income tax when you withdraw the money from the account throughout retirement. 


Roth IRAs are generally the best investment option when you think your taxes will be higher in retirement than they are now, and you cannot really contribute to a Roth IRA if you make a lot of money. The limit for singles in 2021 is $140,000 while for married couples the limit is $208,000. Keep in mind that the amount you can contribute changes periodically, and in 2021, the contribution limit is $6,000 a year unless you are 50 or older, where it goes up to $7,000. All brokerage firms, physical or online can offer a Roth IRA, and most banks and investment companies will also give you as an option as well.

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