Roth IRA

A Roth IRA reverses the usual tax treatment of retirement accounts. There is no tax deduction for contributions, but future qualified withdrawals, including all the investment growth, are tax-free. Withdrawals are generally qualified once the account holder is at least 59 and a half and the account has been open for five years.

Roth IRAs are especially attractive for people who expect to be in a higher tax bracket later, such as younger workers early in their careers.

For example, a 25-year-old who contributes regularly to a Roth IRA could, decades later, withdraw all the contributions and growth without paying income tax on them.

Other features include the ability to withdraw contributions, but not earnings, at any time without tax or penalty, and no required minimum distributions during the original owner's lifetime. Direct contributions are not allowed above certain income levels, although people above the limits may still be able to use a conversion. Similar tax-free accounts in other countries include ISAs in the United Kingdom and tax-free savings accounts in Canada.