Roth IRA

A Roth IRA is an Individual Retirement Account where you contribute after-tax money. Unlike a traditional IRA or 401(k), there's no upfront tax deduction — but the trade is that all future growth and withdrawals in retirement are tax-free.

This is enormously valuable for younger investors. If you put $7,000 into a Roth IRA at 25, let it compound at 7% for 40 years, it becomes $105,000 — and you never pay tax on the $98,000 of growth. Same money in a traditional IRA gets taxed at withdrawal at whatever rate you're in then.

Roth contributions are the better choice when you expect your tax rate in retirement to be higher than your tax rate now. For most people early in their careers, that's true — incomes rise, careers progress, future tax policy is uncertain (but rarely goes down).

Limits in 2024: $7,000 per year if under 50, $8,000 if over. Income limits apply at higher earnings (the "backdoor Roth" technique works around them for high earners, but it's an entire topic on its own).

Roth contributions (not earnings) can be withdrawn at any time, tax- and penalty-free. That makes it a backup emergency fund of sorts.