Tax-Free Retirement Withdrawals

QCan you explain Roth IRAs? — B.T., Hattiesburg, Mississippi

AWe’ll explain not only Roth IRAs, but also Roth 401(k)s. Just as there are two main kinds of IRAs — traditional and Roth — many companies now offer their workers the choice between traditional and Roth 401(k)s. With a traditional IRA and 401(k), you contribute pre-tax money that reduces your taxable income and, therefore, your tax bill for the year. For example, if you earn $60,000 and contribute $5,000, your taxable income drops to $55,000. When you withdraw the money in retirement, it’s taxed as ordinary income to you. With Roth IRAs and 401(k)s, though, you contribute post-tax money that doesn’t deliver any upfront tax break. But you eventually get a big tax break when you withdraw from the account in retirement — because if you follow the rules, it’s all tax-free. For 2017, you can contribute up to $5,500 and $18,000 to IRAs and 401(k)s, respectively, with an additional $1,000 and $6,000 allowed, respectively, for those age 50 or older. If you contribute $8,000 per year for 20 years and your contributions grow by 8 percent on average annually, you’ll end up with almost $400,000 — and you can take it all out tax-free in retirement! For practical retirement guidance and recommended stocks and mutual funds, try our “Rule Your Retirement” newsletter for free at fool.com/shop/newsletters.

QWhat good books cover stock market history? — P.L., Brooklyn, New York

ACheck out the classic “Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business” by Peter Lynch and John Rothchild (Simon & Schuster, $17) and Peter Bernstein’s “Capital Ideas: The Improbable Origins of Modern Wall Street” (Wiley, $20).