A Roth IRA lets you put after-tax money in and withdraw it tax-free later

A Roth IRA is a retirement savings account where you contribute money that has already been taxed. The money grows over time through investments you choose, and when you withdraw it in retirement, you pay no federal income tax on the earnings. This is the opposite of a traditional IRA, where contributions may be tax-deductible now but withdrawals are taxed later.

The account is named after Senator William Roth, who introduced the legislation in 1997. It is offered by banks, brokerages, and investment firms. You open one by choosing a provider, funding it with your own money, and selecting how to invest that money — usually through stocks, bonds, mutual funds, or target-date funds.

Key Takeaways

  • You contribute after-tax dollars to a Roth IRA, meaning the money has already been taxed as income before it goes in.
  • Your contributions and earnings grow tax-free inside the account, and you owe no federal tax when you withdraw them after age 59½.
  • You can withdraw your contributions (not earnings) at any time without penalty, even before retirement.
  • Income limits determine whether you can contribute the full amount, and these limits change each year based on your filing status and modified adjusted gross income.
  • You must have earned income to contribute, and you cannot contribute more than you earned that year.

How contributions work and what you can put in each year

You fund a Roth IRA with money from your paycheck or self-employment income. The IRS sets a yearly contribution limit — the amount you are allowed to put in during a calendar year. For 2024, that limit is $7,000 if you are under age 50, and $8,000 if you are 50 or older (the extra $1,000 is called a "catch-up" contribution). These limits change periodically, so check the current year's limit before you contribute.

You must have earned income to contribute. This means wages from a job, self-employment income, or taxable alimony. You cannot contribute more than you earned that year. For example, if you made $4,000 in 2024, you can contribute up to $4,000 to a Roth IRA, not the full $7,000 limit.

You can contribute at any time during the year or up to the tax filing deadline the following year (usually April 15). Many people spread contributions across the year, but you can also contribute the full amount in one lump sum if you have the money available.

Income limits that reduce or prevent contributions

The IRS limits who can contribute to a Roth IRA based on your modified adjusted gross income (MAGI) and filing status. If your income is above a certain threshold, you cannot contribute the full amount — or cannot contribute at all. These thresholds change each year.

For 2024, if you file as single, the phase-out range is roughly $146,000 to $161,000 MAGI. If you file as married filing jointly, it is roughly $230,000 to $240,000. If you are married filing separately, the range is much lower. If your income falls within the phase-out range, you can contribute a reduced amount. If your income exceeds the upper limit, you cannot contribute to a Roth IRA that year through the standard method.

Check the IRS website or ask your tax preparer for the exact limits for your filing status and the current year, since these numbers shift annually. Some people use a "backdoor Roth" strategy if their income exceeds the limit, but that involves specific steps and tax considerations.

How your money grows inside the account

Once your money is in the Roth IRA, you choose how to invest it. The account itself is just a container — you decide what goes inside. Most people invest in mutual funds, exchange-traded funds (ETFs), individual stocks, or bonds. Some accounts offer target-date funds, which automatically adjust from stocks to bonds as you near retirement.

Any earnings — dividends, interest, or capital gains — grow tax-free inside the account. You do not pay taxes on these earnings each year like you would in a regular investment account. This tax-free growth compounds over decades, which is why starting early with a Roth IRA can result in significantly more money at retirement.

You can move money between investments within the same Roth IRA without triggering taxes. You can also transfer your Roth IRA to a different provider if you find better investment options or lower fees — this is called a "rollover" and does not count as a withdrawal.

When and how you can withdraw your money

A Roth IRA has two types of withdrawals: contributions and earnings. Contributions are the dollars you put in. Earnings are the investment gains on top of that. The rules for each are different.

You can withdraw your contributions at any time, for any reason, with no penalty and no taxes owed. This is one major advantage of a Roth IRA — your own money is always accessible. If you contributed $5,000 and it grew to $7,000, you can withdraw the $5,000 contribution without consequence.

Withdrawing earnings is more restricted. If you are under age 59½ and have not held the account for at least five years, you generally owe income tax and a 10% penalty on the earnings you withdraw. However, there are exceptions: you can withdraw earnings penalty-free (though not tax-free) for a first home purchase (up to $10,000 lifetime), certain medical expenses, disability, or a few other specific situations.

After age 59½ and once the account has been open for five years, you can withdraw both contributions and earnings tax-free and penalty-free. There is no required minimum withdrawal age with a Roth IRA — you can leave the money in as long as you want, even past age 72.

The five-year rule and what it actually means

The five-year rule is often misunderstood. It does not mean you must wait five years from your first contribution to withdraw anything. It means you must have held a Roth IRA account for at least five years before you can withdraw earnings tax-free.

The five-year period starts on January 1 of the year you make your first contribution to any Roth IRA. If you opened a Roth IRA in 2020, the five-year period ends on January 1, 2025. After that date, you can withdraw earnings tax-free if you are also age 59½ or meet another exception (disability, first home, etc.).

If you have multiple Roth IRAs, the five-year rule applies to all of them together — you do not restart the clock with each new account. If you convert a traditional IRA to a Roth IRA, that conversion has its own five-year rule for the converted amount, separate from your regular Roth contributions.

Roth IRA versus traditional IRA: the main differences

A traditional IRA and a Roth IRA are both retirement accounts, but they work in opposite directions. With a traditional IRA, you may deduct your contributions from your taxes now, but you pay income tax on withdrawals in retirement. With a Roth IRA, you pay taxes on the money before it goes in, but withdrawals are tax-free.

A traditional IRA requires you to start taking withdrawals at age 73 (as of 2023, under the SECURE 2.0 Act). A Roth IRA has no required withdrawals during your lifetime. If you think your tax rate will be higher in retirement, a Roth IRA may be better. If you think your tax rate will be lower, a traditional IRA may save you more money.

You can have both a traditional IRA and a Roth IRA, but your total contributions to both accounts combined cannot exceed the yearly limit. For example, 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).

Frequently Asked Questions

Can I withdraw my contributions before retirement without penalty?

Yes. You can withdraw the money you contributed at any time, for any reason, with no tax or penalty. The five-year rule and age 59½ requirement only apply to earnings, not to your contributions. This makes a Roth IRA more flexible than a traditional IRA if you need access to your money.

What happens if I withdraw earnings before age 59½?

You owe income tax on the earnings plus a 10% penalty, unless you meet an exception. Exceptions include disability, a first home purchase (up to $10,000 lifetime), certain medical expenses, or higher education costs. Even with an exception, you may owe income tax on the earnings — the penalty is waived, but the tax is not always.

Do I have to invest my Roth IRA in stocks?

No. You can invest in stocks, bonds, mutual funds, ETFs, target-date funds, or even keep cash in the account. The choice depends on your risk tolerance and how many years until retirement. Many people use target-date funds that automatically shift from stocks to bonds as they age.

What if my income is too high to contribute?

If your income exceeds the phase-out range, you cannot contribute directly to a Roth IRA. Some people use a "backdoor Roth" strategy, where they contribute to a traditional IRA and then convert it to a Roth IRA. This involves tax considerations and should be discussed with a tax professional before you attempt it.

Can I open a Roth IRA if I do not have a job?

No. You must have earned income to contribute to a Roth IRA. Earned income includes wages, self-employment income, or taxable alimony. Passive income like dividends or rental income does not count. If you are self-employed, you can contribute based on your net self-employment income.