How money moves in and out of a Roth IRA

A Roth IRA is a retirement savings account where you put in after-tax money — money you've already paid income tax on — and then the money grows tax-free. When you withdraw it in retirement, you pay no tax on the growth or the original contributions. The account itself doesn't invest the money; you choose what goes inside it, usually stocks, bonds, or mutual funds through a brokerage or bank.

You deposit money into the account, that money buys investments you select, those investments gain or lose value over time, and decades later you can take the money out without owing federal income tax on any of it. The catch is that you can only contribute money you earned from work — you can't fund a Roth with inheritance, investment gains, or unemployment benefits.

The IRS sets a yearly limit on how much you can put in. For 2024, that limit is $7,000 if you're under 50, and $8,000 if you're 50 or older. That limit changes most years. If you earn less than the limit, you can only contribute what you earned.

Key Takeaways

  • You contribute after-tax money to a Roth IRA, meaning you pay income tax on it before it goes in, and then never pay tax on it again.
  • The money you contribute can be withdrawn at any time without penalty, but investment growth cannot be withdrawn before age 59½ without a 10 percent penalty and income tax.
  • You choose what investments go inside the account — the Roth IRA is just the container, not the investment itself.
  • Annual contribution limits are set by the IRS and change most years; for 2024 the limit is $7,000 for people under 50.
  • There is no required withdrawal age for Roth IRAs, so the money can stay and grow for as long as you live.

Who can contribute and how much per year

To contribute to a Roth IRA, you must have earned income from work — a W-2 job, self-employment, or gig work. You cannot contribute more than you earned that year. If you made $3,000 in freelance income, your maximum contribution is $3,000, even if the IRS limit is higher.

Income limits also apply. If your income is above a certain threshold, you cannot contribute the full amount, and above a higher threshold, you cannot contribute at all. These thresholds depend on your filing status (single, married filing jointly, etc.) and change every year. For 2024, a single person with income over $146,000 cannot contribute; a married couple filing jointly with income over $230,000 cannot contribute. Check the IRS website or your brokerage for the current year's limits.

You can contribute to a Roth IRA at any age as long as you have earned income. There is no age limit to start one or to keep contributing.

What happens to your money as it grows

Once money is in the account, you direct it into investments — usually through a brokerage platform where you pick individual stocks, mutual funds, exchange-traded funds (ETFs), or bonds. The Roth IRA itself is just the legal wrapper; the investments inside are what actually grow or shrink.

All growth inside the account — dividends, capital gains, interest — is not taxed while it sits there. If you own a mutual fund that gains $5,000 in value, you owe no tax on that $5,000 that year. If you sell a stock inside the account for a profit, you owe no tax on the profit. This tax-free growth is the main reason people use Roth IRAs instead of regular taxable investment accounts.

You can buy and sell investments inside the account as often as you want without triggering any tax or penalty. You can move money between different investments within the same account. The account itself generates no tax bill no matter how much trading or growth happens inside it.

When you can withdraw contributions versus investment growth

The rules for withdrawals are strict and depend on what you're taking out. Your contributions — the money you put in from your own pocket — can be withdrawn at any time, at any age, with no tax and no penalty. If you contributed $50,000 over ten years, you can pull out $50,000 whenever you want.

The investment growth — the gains your money earned — is different. If you withdraw growth before age 59½, you owe a 10 percent penalty on that amount plus income tax on it. There are a few exceptions: if you're disabled, if you use it for a first-time home purchase (up to $10,000 lifetime), or if you take substantially equal periodic payments under IRS rules. Most people cannot withdraw growth early without cost.

To withdraw growth penalty-free, you must be 59½ or older AND the account must have been open for at least five years. If you opened a Roth IRA at age 58, you cannot withdraw growth penalty-free until age 63, even though you've reached 59½, because the five-year rule hasn't passed.

The five-year rule and when you can take everything out

The five-year rule is a separate requirement from your age. Your account must exist for five tax years before you can withdraw any growth tax-free and penalty-free. The clock starts on January 1 of the year you open the account, not the day you open it. If you open a Roth IRA on December 15, 2024, the five-year period began on January 1, 2024.

Once you turn 59½ AND the account has been open for five years, you can withdraw everything — contributions and growth — with no tax and no penalty. This is called a may have access to distribution. If either condition is missing, withdrawals of growth are taxed and penalized.

If you die, your beneficiary can withdraw the money, though the tax treatment depends on their relationship to you and when they withdraw it. Consult a tax professional or the account custodian for details on inherited Roth IRAs.

No required withdrawals in your lifetime

Unlike traditional IRAs and 401(k)s, a Roth IRA has no required minimum distribution (RMD). You never have to withdraw money at any age. The account can sit and grow for your entire life, and you can leave it to heirs. This makes a Roth IRA useful for people who don't need the money in retirement and want to pass wealth to the next generation.

Your heirs will owe tax on the growth when they withdraw it, but the account itself can continue to exist and grow after your death if they choose not to withdraw immediately.

How a Roth IRA differs from a traditional IRA or 401(k)

A traditional IRA lets you deduct contributions from your taxes in the year you make them, which lowers your tax bill that year. But when you withdraw money in retirement, you pay income tax on everything you take out. A Roth IRA is the opposite: you pay tax now, nothing later.

A 401(k) is offered by an employer and usually includes an employer match — assistance programs your employer adds to your account. A Roth IRA is opened by you individually and has no employer match. A 401(k) has higher contribution limits ($23,500 in 2024 versus $7,000 for a Roth IRA). A 401(k) requires you to start withdrawing money at age 73; a Roth IRA does not.

The choice between them depends on your income now versus expected income in retirement, your employer's match, and how long you plan to let the money grow. Many people use both.

Frequently Asked Questions

Can I withdraw my contributions anytime without penalty?

Yes. Contributions you put in from your own paycheck can be withdrawn at any time, at any age, with no tax and no penalty. Only the investment growth is restricted. This is one reason people use Roth IRAs as emergency savings, though it's not the intended purpose.

What happens if I withdraw growth before age 59½?

You owe a 10 percent penalty on the amount withdrawn plus income tax on it at your regular tax rate. A few exceptions exist: disability, first-time home purchase (up to $10,000 lifetime), and certain hardship situations. Otherwise, early withdrawal of growth is costly.

Does the five-year rule reset if I open a second Roth IRA?

No. The five-year rule applies to all your Roth IRAs combined, not to each account separately. If you opened your first Roth IRA in 2020, all your Roth IRAs satisfy the five-year rule as of 2025, even if you opened a new one in 2024.

Can I contribute to a Roth IRA if I'm self-employed?

Yes, as long as you have net self-employment income. You can contribute up to the annual limit or the amount you earned, whichever is smaller. Self-employed people can also open a Solo 401(k) or SEP IRA, which have higher contribution limits.

What if my income is too high to contribute?

If your income exceeds the limit, you cannot contribute directly. Some people use a "backdoor Roth" strategy: contribute to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. This is legal but has tax consequences; consult a tax professional before attempting it.