A Roth IRA is a retirement savings account where you contribute money after taxes, and withdrawals in retirement are tax-free

A Roth IRA is an individual retirement account that works backward from a traditional IRA. You put in money you've already paid income tax on, and when you withdraw that money in retirement — along with any growth it earned — you owe no federal income tax on any of it. The account is opened in your name at a bank, brokerage, or credit union, and you decide how to invest the money inside it.

The trade-off is simple: you pay taxes now on the money going in, so you pay nothing later. With a traditional IRA, you often get a tax deduction when you contribute, but you pay taxes on everything you withdraw in retirement. A Roth flips that timeline. This matters most if you expect to be in a higher tax bracket when you retire, or if you want to avoid taxes on investment gains.

You can open a Roth IRA at nearly any financial institution — a bank, a brokerage like Fidelity or Vanguard, a credit union, or an online investment platform. There is no employer involved. You fund it yourself, and you control what happens to the money inside.

Key Takeaways

  • You contribute after-tax money to a Roth IRA, and may have access to withdrawals in retirement are completely tax-free.
  • Annual contribution limits are set by the IRS and change year to year; for 2024 the limit is $7,000 for people under 50 and $8,000 for people 50 and older.
  • You can withdraw the money you contributed (not the earnings) at any time without penalty, but earnings withdrawals before age 59½ usually trigger taxes and a 10 percent penalty.
  • Income limits determine whether you can contribute directly to a Roth IRA; if your income is too high, a backdoor Roth conversion may be an option.
  • A Roth IRA has no required minimum withdrawals during your lifetime, so the account can keep growing tax-free as long as you live.

How much you can contribute each year

The IRS sets an annual limit on how much you can put into a Roth IRA. 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, usually when inflation reaches a certain threshold.

You can contribute less than the limit — there is no minimum. You can also split your contributions across multiple accounts if you want, but the total across all your IRAs cannot exceed the annual limit. If you contribute more than the limit, the IRS charges a 6 percent excise tax on the excess amount each year until you remove it.

The contribution limit applies only to money you earn from work — wages, salary, or self-employment income. If you have no earned income in a year, you cannot contribute to a Roth IRA that year, even if you have money in the bank.

Income limits that affect who can contribute

The IRS restricts Roth IRA contributions based on your modified adjusted gross income (MAGI). If your income is above a certain threshold, you cannot contribute the full amount, and if it is above a higher threshold, you cannot contribute at all. These thresholds change every year and depend on your filing status (single, married filing jointly, etc.).

For 2024, if you are single and your MAGI is $146,000 or more, you cannot contribute to a Roth IRA directly. If you are married filing jointly, the limit is $230,000. These are the upper limits; contributions begin to phase out at lower income levels. Your financial institution or tax preparer can tell you whether you fall within the range for the current year.

If your income exceeds the limit, you have other options. A backdoor Roth is a legal strategy where you contribute to a traditional IRA and then convert it to a Roth IRA. This works regardless of income, though it has tax consequences if you already have other traditional IRA balances. A tax professional can walk you through whether this makes sense for your situation.

When you can withdraw money without penalty

The rules for withdrawals differ depending on whether you are taking out money you contributed or money your investments earned. Money you contributed (called your basis) can be withdrawn at any time, at any age, with no tax or penalty. This is one of the Roth IRA's main advantages — your contributions are always accessible.

Earnings — the growth your investments generated — are a different story. If you withdraw earnings before age 59½, you owe federal income tax on them plus a 10 percent early withdrawal penalty, unless an exception applies. The main exceptions are disability, medical expenses above a certain threshold, a first home purchase (up to $10,000 lifetime), and a few others. The rules are specific, so check with a tax professional if you think an exception might apply.

There is one more requirement for tax-free earnings withdrawals: the account must have been open for at least five tax years. This five-year rule applies to each Roth IRA separately, so if you open a new Roth IRA, that account has its own five-year clock.

What happens to the account after you turn 59½

Once you reach age 59½, you can withdraw both your contributions and your earnings tax-free and penalty-free, as long as the account has been open for at least five tax years. There is no requirement that you withdraw anything — you can leave the money in the account and keep it growing tax-free for as long as you live.

This is a major difference from a traditional IRA or a 401(k). Those accounts require you to start taking money out at age 73 (as of 2023; this age may change). A Roth IRA has no required minimum distributions during your lifetime. You withdraw only what you need, when you need it. This flexibility can be valuable if you do not need the money right away or if you want to leave the account to your heirs.

When you pass away, your heirs inherit the Roth IRA. They must withdraw the money within a certain timeframe (usually 10 years under current rules), but those withdrawals are still tax-free to them. This makes a Roth IRA a powerful tool for leaving money to the next generation.

How to open a Roth IRA and what to invest in

Opening a Roth IRA takes about 15 to 30 minutes. You choose a financial institution — a bank, brokerage, credit union, or online platform — and fill out an application. You will need your Social Security number, proof of identity, and a funding method (a bank account to transfer money from). Many institutions let you do this entirely online.

Once the account is open, you decide what to invest the money in. The account itself is just a container; the investments inside are up to you. Common choices are mutual funds, exchange-traded funds (ETFs), individual stocks, and bonds. Some people choose a simple target-date fund that automatically adjusts as they get closer to retirement. Others build a custom portfolio. Your financial institution will show you the options available.

You can also open a Roth IRA through your employer if they offer one, though this is less common than a 401(k). An employer-sponsored Roth IRA works the same way as an individual Roth IRA — contributions are after-tax, and withdrawals are tax-free — but the money is deducted from your paycheck.

Roth IRA versus traditional IRA: the main differences

The core difference is tax timing. A traditional IRA often gives you a tax deduction when you contribute (lowering your taxable income that year), but you pay income tax on withdrawals in retirement. A Roth IRA takes the opposite approach: no deduction now, but no taxes on withdrawals later. Which one makes more sense depends on whether you expect your tax bracket to be higher or lower in retirement.

A traditional IRA requires you to start withdrawing money at age 73. A Roth IRA does not. If you do not need the money, you can leave it alone and let it grow. This also means you can keep contributing to a Roth IRA as long as you have earned income, even after age 73, whereas traditional IRA contributions stop at age 73.

A traditional IRA has no income limits — anyone with earned income can contribute. A Roth IRA does have income limits, though a backdoor Roth can work around them. Both accounts have the same annual contribution limits and the same early withdrawal penalties on earnings.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can have both. However, your total contributions to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth IRA that year (assuming the $7,000 limit for 2024). The limit is across all IRAs, not per account.

What if my income changes during the year?

Contribution limits are based on your income for the entire tax year. If you contribute early in the year and your income rises above the limit by December, you may have contributed too much. You can withdraw the excess contribution and any earnings on it before your tax return is due, though you will owe taxes on the earnings portion.

Can I withdraw my contributions if I need the money before retirement?

Yes. Money you contributed can be withdrawn anytime, tax-free and penalty-free. Only earnings are subject to taxes and penalties if withdrawn early. This makes a Roth IRA more flexible than a traditional IRA if you need access to your money.

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

You do not report contributions or withdrawals of your contributions on your tax return. If you do a backdoor Roth conversion, that conversion must be reported. Your financial institution will send you a Form 5498 each year for your records, but you do not file it with your tax return.

What if I made a mistake and contributed too much?

Contact your financial institution as soon as you realize the error. You can withdraw the excess contribution and any earnings on it. If you do this before your tax return is due (including extensions), you avoid the 6 percent excise tax. The earnings portion is taxable, but the contribution itself is not.