What is a Roth IRA?
July 3, 2024
A Roth IRA is an Individual Retirement Account that allows contributions of after-tax dollars towards your retirement. The main benefit of a Roth IRA is that the contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age of 59.5 (if your account has been open for at least five years). In simple terms, you only pay taxes on the money that goes into your Roth IRA, and all future withdrawals are tax-free.
As of 2024, the maximum annual contribution an individual can make to a Roth IRA is $7,000. If you’re 50 or older, you can contribute $8,000. Once you make your contributions, you have to actually invest the money in assets such as mutual funds, stocks, bonds, exchange-traded funds (ETFs), and money market funds.
At first saving for retirement didn’t sound too sexy to me being in my early twenties, but after looking into it and understanding how compound interest works, it completely changed my perspective on planning for retirement. I should have started contributing some money to a retirement account when I started making money in middle and high school reselling sneakers, clothes, and used iPhones. However, the second-best time is now, and I’m taking advantage of the time benefit I have starting to invest at a younger age.
Also, IRA stands for “Individual Retirement Account,” and Roth refers to William Roth, a U.S. Senator from Delaware who wanted to increase access to IRAs.