roth ira
Roth IRA is a United States retirement account where you pay tax on the money before you put it in, so withdrawals in old age come out completely free of tax.
In plain English
Here is the backwards part. Everything you have ever learned about savings tells you to look for the tax break now. The Roth IRA hands you the tax break later instead, and somehow that turns out to be the smarter deal for a lot of people.
With a normal retirement account in the United States, you get to skip tax on the money you put in today, but the government taxes you when you withdraw it as an old man or woman. With a Roth IRA, you pay the tax today, upfront, on money you have already earned, and then the account grows for decades untouched by tax. When you finally withdraw it in retirement, not one kobo, or rather not one cent, goes to the tax man again.
Think about a Nigerian professional living in Houston or Atlanta on a work visa or green card. She earns her salary, tax has already been deducted by her employer, and she puts part of what is left into a Roth IRA. Twenty five years later when she retires, whatever that account has grown to, even if it has tripled or quadrupled, she carries home free and clear.
This matters most for younger people early in their careers, because their income now is often lower than what it will be later, so the tax they pay today is smaller than the tax they would have paid on withdrawal in future. It is like paying customs duty while the goods are still cheap, rather than waiting until the price has gone up.
There are limits on how much you can contribute yearly, and rules about who qualifies based on income, so it is not a free for all account. But for the right person, it is one of the few places in the tax system where patience is rewarded twice, once by compounding and once by the tax office simply staying out of your business.
Someone contributes the dollar equivalent of about ₦1,500,000 yearly into a Roth IRA for 20 years. If the account grows to the equivalent of ₦120,000,000 by retirement, every bit of that ₦120,000,000 comes out with no tax owed, because the tax was already settled on the way in.
Questions people ask
Can a Nigerian living in Nigeria open a Roth IRA?
Generally no, because a Roth IRA is a United States retirement account and usually requires United States earned income and a valid social security number. Nigerians working legally in the United States, including those on visas that permit work, are typically the ones eligible.
What happens if I withdraw from a Roth IRA early?
You can usually withdraw your original contributions anytime without penalty, since you already paid tax on that money. But withdrawing the investment growth before retirement age often attracts taxes and a penalty, so it is wise to treat the account as untouchable until retirement.
Is a Roth IRA better than a regular retirement account?
It depends on your income now versus what you expect in retirement. If you expect to earn more later or believe tax rates will rise, paying tax now through a Roth IRA often works out better. A financial adviser familiar with your specific numbers can help you decide.
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