Roth IRA
Definition
A retirement account funded with after-tax dollars where investments grow tax-free and qualified withdrawals in retirement are completely tax-free, including all investment gains.
The Roth IRA is often considered the most powerful retirement savings vehicle available. While you don't get a tax deduction for contributions (they're made with after-tax money), the trade-off is extraordinary: all investment growth and qualified withdrawals are completely tax-free. If you contribute $7,000 per year and it grows to $500,000, you owe zero tax on that $493,000 of growth.
Income limits restrict who can contribute directly to a Roth IRA. For 2025, the ability to contribute phases out for single filers with MAGI between approximately $150,000-$165,000 and married filing jointly between approximately $236,000-$246,000. Higher earners can use the "backdoor Roth" strategy — contribute to a traditional IRA and then convert to Roth.
Roth IRA advantages go beyond tax-free growth. Unlike traditional IRAs and 401(k)s, Roth IRAs have no Required Minimum Distributions (RMDs) during the owner's lifetime. This means your money can continue growing tax-free indefinitely. Contributions (not earnings) can also be withdrawn at any time without penalty, providing flexibility.
The Roth is most beneficial for people who expect to be in a higher tax bracket in retirement than they are now. Young investors in early career stages are ideal Roth candidates — they're in lower tax brackets now and paying tax on contributions costs less than paying tax on much larger withdrawals decades later.
A backdoor Roth IRA conversion allows high earners to fund a Roth despite income limits. You contribute to a non-deductible traditional IRA, then immediately convert to Roth, paying tax only on any gains (which are minimal if converted quickly). This strategy is widely used but requires careful handling of the pro-rata rule if you have existing traditional IRA balances.
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Frequently Asked Questions
Is a Roth IRA better than a traditional IRA?
It depends on your current vs future tax rate. If you're in a low tax bracket now (early career), Roth is usually better since you pay taxes at a low rate now and withdraw tax-free later. If you're in a high tax bracket near retirement, traditional may save more. Many advisors recommend having both for tax diversification.
What is a backdoor Roth IRA?
It's a strategy for high earners to fund a Roth IRA despite income limits. You contribute to a non-deductible traditional IRA and then convert it to a Roth, paying tax only on any gains. The IRS has acknowledged this strategy. Be aware of the pro-rata rule if you have other traditional IRA balances.