How does a Roth IRA work and why is it important?
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A Roth IRA is a tax advantaged brokerage account. Normally when you have a brokerage account, any gains you make on assets you buy within the account are taxable so for example if I buy 1 share of X corp at $100 in my normal brokerage account and the value of that share goes up to $120 if I sell the share I owe taxes on the $20 gain I made. In a Roth IRA I don’t owe any taxes on that gain provided that I withdraw/sell after I’m 60 and also with the added caveat that I can only contribute a certain amount of money to the account per year( right now you can contribute a max of $6500 for the 2023 tax year), this maximum also decreases the more income you make and after a certain income threshold you are not allowed to contribute at all. As for the reason why having a Roth IRA is important is largely due to having tax free gains. If you dutifully start contributing and maxing out your account from the time you are young till retirement age in your 60s those gains can be a ton of money which you have as a tax free nest egg to enjoy for your retirement
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