In retirement terminology, the term Roth IRA refers to a United States retirement plan which was established in the Taxpayer Relief Act of 1997. The Roth IRA plan allows taxpayers with certain limitations on their income to save for their retirement on a tax-free basis.
For example, in a Roth IRA, contributions are taxed. Nevertheless, depending on the rules of the plan, withdrawals from the plan are not. Contribution amounts are dependent on the tax-bracket, age and income of the taxpayer and are generally invested in Mutual Funds, bonds or stocks. This type of IRA allows the taxpayer to make withdrawals at any age and also allows an individual a qualified tax-free withdrawal of up to $10,000 for the purchase of a first new home. Withdrawals of interest are taxable and subject to the 10% IRS penalty, with the exception of the money being withdrawn in the event of death, total disability, medical expenses or higher education needs.