Pay taxes now. Never pay taxes on this money again.
A Roth IRA (Individual Retirement Account) is a retirement savings account that you fund with money you've already paid taxes on (after-tax dollars). In exchange, all investment growth inside the account and all qualified withdrawals in retirement are completely tax-free.
This is the opposite of a Traditional IRA, where contributions may be tax-deductible now but withdrawals in retirement are taxed as ordinary income. With a Roth IRA, you take the tax hit upfront and pay nothing later — making it especially powerful for young investors who expect to be in a higher tax bracket in retirement.
You max out your Roth IRA at $7,000/year starting at age 25, invest in an S&P 500 index fund, and retire at 65 (40 years). Assume 7% average annual return.
In a taxable account, $1.2M of that growth would be subject to capital gains tax. In a Roth IRA: $0 tax owed.
Choose Roth IRA if: you're in a low tax bracket now, you're young and expect income to grow, you want tax-free income in retirement, or you want flexibility (no RMDs).
Choose Traditional IRA if: you're in a high tax bracket now and expect lower income in retirement, you need the immediate tax deduction, or you exceed Roth income limits (though Backdoor Roth conversion may still apply).
Many financial planners suggest contributing to both — a Roth IRA and a Traditional 401(k) — to have both taxable and tax-free income sources in retirement.
See how much tax-free wealth a Roth IRA could build for you.