A Roth IRA lets you save for retirement with after-tax money, then withdraw it tax-free in retirement

A Roth IRA is a retirement savings account where you contribute money you have already paid income tax on. The account grows tax-free, and when you withdraw money in retirement — after age 59½ — you owe no federal income tax on the growth or the original contributions. This is the opposite of a traditional IRA, where contributions may be tax-deductible now but withdrawals are taxed later.

The trade-off is simple: you pay tax on the money going in, but the government does not tax you on the way out. For people who expect to be in a higher tax bracket in retirement, or who want to lock in current tax rates, a Roth IRA can save thousands in taxes over decades.

Key Takeaways

  • You fund a Roth IRA with after-tax dollars, meaning you cannot deduct the contribution from your current income taxes.
  • All investment growth inside the account is tax-free, and you pay no federal income tax when you withdraw money after age 59½.
  • You can withdraw your original contributions (not the growth) at any time without penalty, though growth withdrawn early is subject to tax and a 10% penalty.
  • Income limits apply: if you earn above a certain threshold, you cannot contribute directly to a Roth IRA, though a backdoor Roth conversion may be an option.
  • Unlike a traditional IRA, you are not required to take withdrawals at any age, so the account can grow for your entire life.

How contributions and withdrawals work in a Roth IRA

You can contribute up to a set dollar amount each year — the limit changes annually and depends on your age. For 2024, the limit is $7,000 per year if you are under 50, or $8,000 if you are 50 or older. You can contribute this money at any time during the year or up until the tax filing deadline the following April.

The money you put in stays yours. You can withdraw your contributions at any time, for any reason, without tax or penalty. This is different from a traditional IRA, where early withdrawal of contributions triggers a 10% penalty. However, if you withdraw the investment growth before age 59½, you owe income tax on that growth plus a 10% penalty — unless you meet a narrow exception like disability or a first-time home purchase (up to $10,000 lifetime).

Once you turn 59½ and have held the account for at least five years, all withdrawals — contributions and growth together — are tax-free. There is no age at which you must start taking money out, so the account can compound for as long as you live.

Income limits and who can contribute

The IRS sets income thresholds that determine whether you can contribute directly to a Roth IRA. These limits depend on your filing status and your modified adjusted gross income (MAGI). For 2024, single filers can contribute the full amount if their MAGI is below $146,000; the ability to contribute phases out between $146,000 and $161,000. Married couples filing jointly have higher thresholds: full contribution below $230,000, phase-out between $230,000 and $240,000.

If your income exceeds the limit, you cannot contribute directly. However, you may be able to use a backdoor Roth strategy: contribute to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. This strategy has tax complications if you already have other traditional IRAs, so it is worth understanding the pro-rata rule before you attempt it.

Tax-free growth and the five-year rule

Money inside a Roth IRA grows tax-free, whether it earns interest, dividends, or capital gains. You never file a tax form for the growth inside the account, and you never owe tax on it as long as the money stays in the Roth IRA. This is a major advantage over taxable brokerage accounts, where you owe tax each year on dividends and capital gains.

To withdraw earnings (the growth, not your contributions) tax-free, you must satisfy two conditions: you must be at least 59½ years old, and the account must have been open for at least five years. The five-year rule is per account, not per person, so if you open a Roth IRA at age 58, you cannot withdraw earnings tax-free until age 63 — even though you are over 59½. If you convert a traditional IRA to a Roth, a separate five-year clock starts for the converted amount.

Roth IRA versus traditional IRA: the core difference

The main difference is when you pay tax. With a traditional IRA, you may deduct your contribution from your current income taxes (depending on your income and whether you have a workplace retirement plan), and you pay income tax on withdrawals in retirement. With a Roth IRA, you get no deduction now, but withdrawals are tax-free later.

Choose a Roth IRA if you expect your tax rate to be higher in retirement, or if you want to lock in current tax rates. Choose a traditional IRA if you want to lower your taxable income this year, or if you expect to be in a lower tax bracket when you retire. Some people use both: contribute to a traditional IRA for the current deduction, and contribute to a Roth IRA for tax-free growth later.

A Roth IRA also has no required minimum distributions (RMDs). A traditional IRA requires you to start withdrawing money at age 73, whether you need it or not. If you do not need the money and want to leave it to heirs, a Roth IRA is more flexible.

Inherited Roth IRAs and what happens to your account

If you leave a Roth IRA to a spouse, they can treat it as their own and continue to let it grow tax-free. If you leave it to a non-spouse beneficiary — a child, for example — they must withdraw the entire balance within ten years of your death, though they can spread the withdrawals across those ten years. The withdrawals are tax-free because the money was already taxed when you contributed it.

This makes a Roth IRA a powerful tool for leaving money to heirs. A traditional IRA left to a non-spouse beneficiary triggers the same ten-year rule, but the withdrawals are taxable income to the heir. Over a lifetime, a Roth IRA can transfer far more wealth to the next generation.

Common reasons to open a Roth IRA

Young workers often benefit most from a Roth IRA because they have decades for tax-free growth and are likely in a lower tax bracket now than they will be later. Self-employed people and freelancers use Roth IRAs alongside a Solo 401(k) or SEP IRA to diversify their tax treatment. People who expect a large inheritance or windfall may open a Roth IRA to shelter that growth from future taxes.

A Roth IRA is also useful if you want to save beyond the limits of a workplace 401(k) plan, or if your employer does not offer a retirement plan. Because you can withdraw contributions at any time, some people use a Roth IRA as a flexible emergency fund — though this defeats the purpose of retirement savings and is generally not recommended unless you have no other option.

Frequently Asked Questions

Can I withdraw my contributions from a Roth IRA without penalty?

Yes. You can withdraw the money you contributed (not the growth) at any time, for any reason, with no tax or penalty. This is one of the biggest advantages of a Roth IRA over a traditional IRA. However, if you withdraw the investment earnings before age 59½, you owe income tax on those earnings plus a 10% penalty.

What happens if I exceed the income limit for a Roth IRA?

You cannot contribute directly if your income is above the limit. However, you may be able to do a backdoor Roth conversion: contribute to a traditional IRA and then convert it to a Roth. Be aware that if you have other traditional IRAs, the pro-rata rule may create a tax bill. Consult a tax professional before attempting this strategy.

Do I have to take money out of my Roth IRA at a certain age?

No. Unlike a traditional IRA, a Roth IRA has no required minimum distributions. You can leave the money in the account for your entire life and let it grow tax-free. This makes a Roth IRA useful if you do not need the money in retirement or want to leave it to heirs.

Can I have both a Roth IRA and a traditional IRA?

Yes, but your total contributions across all IRAs cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth IRA that year (assuming the $7,000 limit for 2024). You can split your contributions however you want, as long as the total does not exceed the limit.

What is the five-year rule, and does it apply to me?

To withdraw earnings tax-free, your Roth IRA must have been open for at least five years and you must be at least 59½. The five-year clock starts when you open the account, not when you turn 59½. If you convert a traditional IRA to a Roth, a separate five-year clock starts for the converted amount.