Money goes in after taxes, grows tax-free, and comes out tax-free

A Roth IRA is a retirement savings account where you contribute money that you've already paid income tax on. That money then grows without being taxed each year. When you withdraw it in retirement — after age 59½ — you pay no tax on the growth or the original contributions. The tradeoff is that you don't get a tax deduction when you put the money in, unlike a traditional IRA.

The account itself is held at a bank, brokerage, or credit union. You decide what to invest the money in — usually stocks, bonds, mutual funds, or target-date funds. The account grows based on how those investments perform. You control the account and can see the balance anytime.

Key Takeaways

  • You contribute money you've already paid taxes on, and the account grows without annual tax on the earnings.
  • Withdrawals in retirement (age 59½ or later) are completely tax-free if the account has been open at least five years.
  • There are income limits that determine whether you can contribute the full amount, and these limits change each year.
  • You can withdraw your original contributions (not the earnings) at any time without penalty, even before retirement.
  • The annual contribution limit is the same whether you have one Roth IRA or multiple accounts at different institutions.

How much you can contribute each year

The amount you can put into a Roth IRA each year is set by the IRS and changes periodically. For 2024, the limit is $7,000 if you're under 50, and $8,000 if you're 50 or older (the extra $1,000 is called a "catch-up" contribution). These limits apply to all your Roth IRAs combined — if you have accounts at two different banks, the $7,000 total is split between them.

However, you can only contribute up to the amount of income you earned that year. If you made $3,000 in income, you can only put $3,000 into a Roth IRA, even if the annual limit is higher.

There are also income limits that reduce or eliminate your ability to contribute. These limits depend on your filing status and your modified adjusted gross income (MAGI). If your income is above the limit for your filing status, you cannot contribute to a Roth IRA at all. The income limits change each year and vary significantly by whether you're single, married filing jointly, or married filing separately.

How the account grows over time

Once money is in your Roth IRA, it's invested according to your choices. If you invest in a stock mutual fund, the account grows when that fund gains value. If you invest in bonds, you earn interest. Some people keep their Roth IRA in a money market fund or savings option that earns a small, may provide return.

The key difference from a regular taxable investment account is that you pay no tax on the earnings each year. In a regular brokerage account, you'd owe tax on dividends and capital gains annually. In a Roth IRA, those earnings compound without any annual tax bill. This tax-free growth is the main reason people use Roth IRAs for long-term retirement saving.

You can move money between investments within the same Roth IRA account without triggering any tax or penalty. You can also transfer your entire Roth IRA from one institution to another (called a "rollover" or "transfer") without tax consequences, as long as the money goes directly from one account to the other.

When and how you can withdraw money

You can withdraw your original contributions at any time, for any reason, with no tax or penalty. If you put in $5,000 and the account grew to $6,000, you can withdraw the $5,000 contribution whenever you want. This is different from a traditional IRA, where withdrawals before 59½ are usually penalized.

Withdrawals of earnings (the growth) before age 59½ are generally subject to income tax and a 10% penalty, with some exceptions. The main exceptions are if you're withdrawing for a first-time home purchase (up to $10,000 lifetime), certain medical expenses, disability, or a few other specific situations. You must have had the Roth IRA open for at least five years to use these exceptions.

After age 59½, you can withdraw both contributions and earnings tax-free and penalty-free, as long as the account has been open for at least five years. There is no requirement to withdraw money at any age — you can leave it in the account indefinitely and pass it to heirs.

The five-year rule explained

The "five-year rule" means your Roth IRA must have been open for at least five years before you can withdraw earnings tax-free. The clock starts on January 1 of the year you open the account. If you open a Roth IRA on December 31, 2024, the five-year period ends on January 1, 2030.

This rule applies separately to each Roth IRA you open. If you open a second Roth IRA in 2026, that account has its own five-year clock. However, if you convert a traditional IRA to a Roth IRA, a separate five-year rule applies to the converted amount.

The five-year rule does not prevent you from withdrawing your contributions at any time. It only affects whether you can withdraw earnings without tax and penalty.

Roth conversions: moving money from a traditional IRA

You can move money from a traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. This is called a "conversion." When you convert, you pay income tax on the amount converted in that tax year, but the money then grows tax-free in the Roth IRA.

Conversions are useful if you expect to be in a higher tax bracket in retirement, or if you want to move money into an account with no required withdrawals. There are no income limits on conversions, even if your income is too high to contribute directly to a Roth IRA.

After a conversion, the converted amount is subject to its own five-year rule before you can withdraw it penalty-free. If you convert $10,000 and withdraw it three years later before age 59½, you'll owe the 10% penalty on that $10,000, even though your original contributions can be withdrawn anytime.

What happens to a Roth IRA after you die

A Roth IRA does not disappear when you pass away. The account goes to whoever you named as a beneficiary. Beneficiaries can withdraw the money, but the rules depend on their relationship to you and when they withdraw.

A spouse who inherits a Roth IRA can treat it as their own, roll it into their own Roth IRA, or keep it as an inherited account. Non-spouse beneficiaries (children, siblings, friends) must withdraw the entire balance within 10 years of the account owner's death, though they can spread withdrawals across those 10 years. The earnings portion of those withdrawals is tax-free if the account met the five-year rule.

Frequently Asked Questions

Can I contribute to both a Roth IRA and a 401(k) in the same year?

Yes. The contribution limits are separate. Your 401(k) limit and your Roth IRA limit do not affect each other. However, if your income is above certain thresholds, you may not be able to contribute to a Roth IRA if you're also covered by a workplace retirement plan.

What if my income goes above the limit after I've already contributed?

You must withdraw the excess contribution and any earnings on it by the tax filing deadline (usually April 15 of the following year) to avoid penalties. If you don't, you'll owe a 6% penalty tax each year the excess sits in the account. Contact your financial institution to request a withdrawal of excess contributions.

Can I use my Roth IRA to buy a house?

You can withdraw up to $10,000 of earnings (not contributions) for a first-time home purchase, but only if the account has been open at least five years. You can withdraw your contributions anytime. Many people use Roth IRAs as a backup emergency fund because contributions can always come out penalty-free.

Do I have to report my Roth IRA on my taxes?

You don't report the account itself on your tax return. However, if you do a conversion from a traditional IRA to a Roth IRA, you must report the conversion and the amount converted on Form 8606. Withdrawals from a Roth IRA generally don't appear on your tax return.

What if I have a Roth IRA and lose my job?

Your Roth IRA is yours alone and is not affected by employment changes. You can keep contributing if you have earned income, or you can leave the account untouched. If you need money, you can withdraw your contributions without penalty. Your account continues to grow regardless of your job status.