A Roth IRA, or individual retirement account, is a form of individual retirement plan, which, provided certain conditions are met, is generally not taxed under US law. In the United States, the taxation system allows a reduction on a limited amount of saving for retirement. In the case of Roth IRA’s, rather than having a tax break granted for money placed into the plan, the break is granted on the money that is taken out of the fund during retirement. This means that contributions to this form of individual retirement account are not tax-deductible and withdrawals are generally not taxed. Total assets of Roth IRAs in the US have been increasing since 2000.
There are a number of advantages from the account holder’s point of view compared to more traditional forms of IRA. Distributions from a Roth IRA do not increase Adjusted Gross Income, which is important, as the distributions will not increase the taxpayer’s marginal income tax bracket. If the policy holder dies, the account may be combined with that of a spouse without any penalty being incurred.
This form of retirement account also has a couple of disadvantages. The funds that reside in the account cannot be used as collateral for a loan or for financial leveraging for investment purposes. Eligibility to make contributions to a Roth IRA also phases out certain income limits.