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What is a Roth IRA, and how does it differ from a Traditional IRA?

A Roth IRA is a retirement account that allows for tax-free growth and tax-free withdrawals in retirement. Contributions are made with after-tax dollars, meaning you pay taxes on the money before it is deposited into the account. This differs from a Traditional IRA, where contributions are typically made with pre-tax dollars and are taxed upon withdrawal.

Key Differences:

  1. Tax Treatment:

    • Roth IRA: Contributions are after-tax, and withdrawals in retirement are tax-free.
    • Traditional IRA: Contributions are tax-deferred, and withdrawals are taxed as income.

  2. Contribution Limits:

    • Both accounts have similar contribution limits set by the IRS, but income limits for Roth IRAs may prevent higher earners from contributing.

  3. Required Minimum Distributions (RMDs):

    • Roth IRA: No RMDs during the account holder's lifetime.
    • Traditional IRA: RMDs must begin at age 73.

Benefits of Roth IRAs:

  • Tax-free withdrawals in retirement.
  • No RMDs.
  • Ideal for those who expect their tax rate to be higher in retirement.

Conclusion:

The main difference between a Roth IRA and a Traditional IRA is when you pay taxes—Roth IRAs offer tax-free growth and withdrawals, while Traditional IRAs provide tax-deferred contributions but are taxed when you withdraw funds in retirement. Each account has unique benefits, making it important to choose based on your current and future tax situation.