Legal Definitions - Roth IRA

A Roth IRA is a type of individual retirement account where a person can save money for their retirement. The account allows a person to contribute a certain amount of their earned income each year. The contributions and any interest earned in the account are not taxed until the money is withdrawn after the account holder reaches 59 1/2 years old. If the money is withdrawn before then, a penalty of 10% is applied.

For example, if a person earns $50,000 a year and contributes $5,000 to their Roth IRA, they will only be taxed on $45,000 of their income that year. When they reach 59 1/2 years old and withdraw the money, they will not have to pay taxes on the contributions or any interest earned.

A Roth IRA is different from a traditional IRA because contributions to a traditional IRA are tax-deductible when they are made, but the money is taxed when it is withdrawn. With a Roth IRA, contributions are not tax-deductible, but the money is not taxed when it is withdrawn.

Overall, a Roth IRA is a good option for people who expect to be in a higher tax bracket when they retire, as they will not have to pay taxes on the money they withdraw from the account.