Roth IRA – What is a Roth Individual Retirement Account (IRA), Check Features & Benefits?

Roth IRA Full Form?

Roth IRA means an Individual Retirement Account that allows the investor to enjoy tax-free returns and maturity amounts for retirement. This individual retirement plan helps in building a corpus to lead a comfortable life after retirement. The option of tax saving and the flexibility of the plan makes Roth IRA a popular retirement scheme to invest in.

What is a Roth IRA?

IRA full form is Individual Retirement Account. Hence Roth IRA is Roth Individual Retirement Account. A Roth IRA account allows the investor to save money for his/her retirement. This is regarded as one of the best retirement plans that is available with tax benefits.

Roth IRA India is available for investors with flexible terms of withdrawal as well as contributions. The account holder under Roth IRA can grow savings in a tax-free manner for a tenure of their choice. A Roth IRA account can also be created in your spouse’s name to double your retirement savings.

Roth IRA Features 

Features	Details
Flexibility of Contributions	Yes, contributions can be done anytime
Roth IRA Options	Individual Roth IRA – in the name of the investor Spousal Roth IRA – in the name of spouse (non-working)
Spousal Roth IRA	The spouse must be non-working Contributions for the spousal account go from investors’ income
Contributions	Should be made with your income remaining after tax deductions Contributions do not have any tax benefits
Contribution Time Limit	Must be made by the last date of tax filing for the current year
Criteria to Start Distributions	No such criteria
Lock-In Period for Withdrawals	5 years
Early Withdrawals	Yes, withdrawal can be done without penalty for the purchase of your first home or to cover higher education costs
Withdrawals During Retirement	If you withdraw after 59 and half years, it is tax-free. If you withdraw before 59 and half years, you pay a 10% penalty
Tax Benefits	Yes, no tax is deducted from contributions, earned profit and withdrawals, etc.

Roth IRA Eligibility Criteria

• There is no age limit to join the Roth IRA plan
• The Roth IRA income limits state that individuals interested to join the Roth IRA plan should earn income from salary, wages, self-employed, etc.
• In the case of a spousal Roth IRA, you need to file a joint tax return
• Here, the income of the investor must be higher than the Roth IRA contribution limit set for the spousal Roth IRA

How Does a Roth IRA Plan Work?

Here are the steps as to how a Roth IRA plan works:

• The first step is to check the eligibility of the plan and join it by opening the Roth IRA account
• Now, contribute to the account with the income saved after paying your taxes as per the prescribed limit
• You can select from a wide range of investment options such as stocks, bonds, MFs, ETFs, etc.
• Enjoy the tax-free growth of your funds
• If you withdraw your Roth IRA account after completing 59 and half years and the 5-year lock-in period, you can enjoy the tax-free withdrawal
• Earlier withdrawals might be subjected to penalties
• The Roth IRA account doesn’t have minimum distribution criteria at any particular age. Hence, the account holder can enjoy tax-free growth of their funds for long

Roth IRA vs Traditional IRA

Here are some differences between Roth IRA and Traditional IRA:

Particulars	Roth IRA	Traditional IRA
Income limits	There is an income limit set for contributions	There is no income limit set for contributions
Tax benefits	The contributions are made from an income after deducting tax Withdrawals are tax-free	The contributions amount is tax deductible Withdrawals are taxed like regular income
RMDs or Required Minimum Distributions	No RMDs during the lifetime of the account holder	Account holders must take distributions at 72 years
Early Withdrawal Penalties	10% penalty applied if withdrawn before completing 59 and half years of the account holder	A 10% penalty is applied if the amount is withdrawn before 59 and half years of the account holder

Roth IRA Benefits

Roth IRA has several benefits which makes it a popular pension plan. Let us take a look at some of its key benefits: 

• The best thing about a Roth IRA plan is that it allows tax-free withdrawals. So, under this scheme, you can enjoy tax benefits in the case of both earnings and contributions
• Roth IRA doesn’t have a criterion of RMD or Required Minimum Distributions. So, the account holder is not required to take RMDs at a particular age. Hence, they can see their money growing in a tax-free manner over a long period
• Another advantage of a Roth IRA account is that it allows the account holder to pull out their contributions any time they want. There are no penalties for the withdrawal of contributions. However, when it comes to the withdrawal of earnings, it is subject to penalties
• Being a retirement savings strategy, Roth IRA helps in tax diversification during retirement. Hence, you can enjoy withdrawing money from both taxable and tax-free income streams and managing your tax liability during retirement
• Under the spousal Roth IRA India, an investor can open an additional Roth IRA account for their non-working spouse to maximize their retirement savings