Roth IRA Basics: What It Is and Why It Matters

"Roth IRA" sounds like something you need a finance degree to understand. It's actually a pretty simple idea once you break it down.

What it actually is

A Roth IRA is a retirement account. You put in money you've already paid taxes on. In exchange, that money grows completely tax-free, and when you take it out in retirement, you don't owe any taxes on it, not on what you contributed, and not on what it earned.

Why that matters

Compare that to a regular investment account, where you pay taxes on any growth every year. Over decades, that difference adds up to a meaningful amount of money you get to keep instead of sending to the IRS.

Who it makes the most sense for

Roth IRAs tend to make the most sense for people earlier in their career. If you expect to earn more (and be in a higher tax bracket) later in life, paying taxes now, while your rate is lower, can work in your favor.

What to know before opening one

There are yearly contribution limits, and they can change year to year, so it's worth checking the current limit before you start. There are also income limits for who can contribute directly. A licensed financial advisor can help you confirm you're eligible and pick the right investments once your account is open.