The Roth IRA

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The Roth IRA

The Roth IRA is a type of individual retirement account. The principal difference between the Roth and a traditional IRA lies in contributions and withdrawals. While contributions you make to a traditional IRA are tax-deductible (except in certain cases) and your withdrawals are taxed, contributions to a Roth IRA are the opposite. They have already been taxed, but qualified withdrawals are not taxed. (Qualified means you are withdrawing them as intended by law; some types of withdrawals are NOT qualified and will incur a penalty.)

Of course, as in the traditional IRA, the earnings of a Roth are tax-free while they accumulate. But one difference between the two types of IRAs is that in the Roth, those earnings are not taxed when you withdraw them provided that you have followed the rules for taking withdrawals; with the traditional IRA, those earnings are taxed.

No tax deduction allowed

Thus, contributions to a Roth IRA are made with after-tax dollars—in other words, out of your net pay. You do not get a tax deduction for making them.

You may simultaneously contribute to a traditional IRA, as long as the total placed into both accounts does not exceed the annual IRA contribution limit.

Should you have a Roth?

For some investors, the inability to deduct their contributions is a tiny price to pay for tax-free withdrawals that could be quite substantial after years of having grown in a Roth IRA account. Whether to have a Roth account instead of a traditional requires some planning on your part. You should take into account your ability to afford contributions that will come out of your net pay.