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What is a Roth IRA and its tax advantages?


A Roth IRA is one popular way to save for retirement, especially if you're seeking ways to save without paying Uncle Sam.

According to the Investment Company Institute, in 2022, more than four in 10 US households owned IRAs. And while traditional IRAs were the most common retirement vehicle owned by households, Roth IRAs can play a very important role if you're seeking a tax-free way to save for retirement.


What are Roth IRAs? How does it differ from traditional IRAs?


Traditional IRAs allow you to make pre-tax contributions, which can reduce your taxes. Roth IRAs work a bit differently. Your after-tax contributions aren't tax deductible. While both ways allow you to build your nest egg, only a Roth IRA allows your earnings to grow tax-free.

What are the tax advantages of a Roth IRA?


One tax advantage of a Roth IRA is you can withdraw money (your contributions and earnings) tax-free for accounts you own for at least five years if you're over 59 1/2 or older.

Since your contributions to Roth IRAs are after-tax money, it could be a great tool if you expect your tax bracket to increase in your retirement years.

How much can you contribute to a Roth IRA?

For the 2023 tax year, you can contribute up to $6,500. The amount increases if you are over 50 to $7,500. For prior years, 2019 to 2022, the amount is up to $6,000 and $7,000 if you are older than 50.


If you earned less than the income threshold, then the amount is up to your taxable compensation for the year. Your filing status and overall household income determines the amount you can contribute.

What else should people know concerning a Roth IRA?


There are no age limits for Roth IRAs. Therefore you can contribute at any age. You may want to consider opening a Roth IRA account for your child, but they must have earned income. It's important to know the IRS updates the amount you can contribute annually for inflation. But the biggest takeaway, your earnings grow tax-free and can be a nest egg for retirement.

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