Roth IRA

Roth IRA definition - business

Roth IRA

A special type of individual retirement account in which contributions are made with aftertax dollars, but distributions are tax-free as long as certain requirements, including holding period and age, are met. All earnings within the account are free of taxation.

I am getting ready to open an IRA. How do I choose between a Roth IRA and a regular IRA?

It depends largely on federal and state income tax considerations. While the Roth IRA has tax-free earnings, you pay taxes on the money that you put in the Roth IRA. The regular IRA has tax-free contributions, but withdrawals after retirement are taxed. If you think you will be in a higher marginal tax bracket after you retire, you would be better off receiving tax-free distributions when you retire. If you think you will be in a lower marginal tax bracket when you retire, but are in a high bracket now, you would be better off with a regular IRA.

Michael W. Butler, PhD, Professor of Economics, Angelo State University, San Angelo, Texas

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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